IRS Issues New Regulations for Cryptocurrency

Cryptocurrency is a digital, encrypted, and decentralized medium of exchange. While individuals can use it to buy goods and services, most people invest in cryptocurrencies like they would in stocks[1]—waiting for the value to increase and then selling the asset for profit. As time goes on, cryptocurrency continues to become more popular, and the IRS is implementing news ways to regulate and tax it.

On June 28, 2024, the U.S. Department of the Treasury and the IRS issued final tax reporting rules for digital asset brokers. These new regulations will require cryptocurrency platforms to report all user transaction information. Starting in January 2025, cryptocurrency platforms will begin tracking and reporting digital asset transactions on new 1099 forms. In 2026, reporting the cost basis of assets will be required as well.[2]

In the past, cryptocurrency platforms were not required to report complete transactions to the IRS. This left the responsibility of tracking and reporting up to individual investors, leading to under-reporting and errors.[3] Although the IRS currently requires cryptocurrency owners to report their digital asset activities on their tax returns, they arguably have not found any successful way to regulate and check for the accuracy and validity of these transactions. However, now with the new regulations, more transactions will be monitored, and tax revenue is projected to increase.

While these new regulations do not impact all cryptocurrency platforms, they do specifically target platforms like Coinbase, Binance.US, and Kraken—companies that operate as centralized exchanges that hold cryptocurrency on an individual’s behalf. On the other hand, these regulations do not affect decentralized finance (DeFi) platforms; such platforms operate on a peer-to-basis where users hold their own cryptocurrency. However, the IRS and Treasury Department are likely to implement regulations in the future for these DeFi platforms.[4]

The Treasury stated that cryptocurrency owners "have always owed tax on the sale or exchange of digital assets” and that the new regulations "simply created reporting requirements . . . to help taxpayers file accurate returns and pay taxes owed under current law."[5] This is likely one of many regulations the IRS will implement to regulate, monitor, and tax the digital world of cryptocurrency.

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Conclusion

The IRS is cracking down on cryptocurrency owners, making sure that sales/exchanges are properly reported and taxed in the future. If you are an owner of cryptocurrency, be on the lookout for new tax forms and ensure you report all cryptocurrency transactions. Cryptocurrency can be a great investment, but if it is not properly reported on your tax return, it can lead to audits, penalties, and other consequences from the IRS.

Contact Montgomery Legal today to discuss your case and legal options. Schedule a Consultation or call (214) 432-6100.

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[1] Kate Ashford, What Is Cryptocurrency?, Forbes (February 2023), available at https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/.

[2] Rachel Christian, Your Crypto Transactions May Soon Show Up On An IRS 1099 Form. Here’s Who’s Impacted, Bankrate (July 2024), available at https://www.bankrate.com/investing/crypto-transactions-irs-1099/.

[3] Id.

[4] Id.

[5] Hannah Lang, US Treasury Finalizes New Crypto Tax Reporting Rules, Reuters (June 2024), available at https://www.reuters.com/technology/us-treasury-finalizes-new-crypto-tax-reporting-rules-2024-06-28/.