New Filing Requirements for Cryptocurrency and Digital Assets in 2024

The rise of cryptocurrency and digital assets has brought significant changes to the tax landscape in recent years. As these assets become more mainstream, tax authorities have implemented new regulations to ensure proper reporting and compliance. For the 2024 tax year and onward, taxpayers must be aware of the updated filing requirements for cryptocurrency and digital assets. Below, we break down the key changes and what they mean for taxpayers.

Digital Asset Definition & Classification

The term "digital asset" is broadly defined as any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology. The IRS defines "digital assets" as “any digital representation of value recorded on a distributed ledger,” which includes:

• Cryptocurrencies like Bitcoin and Ethereum
• Stablecoins
• Non-fungible tokens (NFTs)

As of January 1, 2023, digital assets are classified as "specified securities," and brokers are required to report transactions involving these assets to the IRS. This includes providing detailed information about the sale or exchange of digital assets, such as the date of acquisition, sale price, and cost basis. This classification means that transactions involving digital assets are subject to capital gains and losses rules, similar to stocks or real estate where you must calculate the gain or loss based on the difference between the sale price and your cost basis. This applies whether the transaction involves converting cryptocurrency to fiat currency, trading one cryptocurrency for another, or using cryptocurrency to purchase goods or services. If you are trading or investing in any of these, you should be prepared to report your transactions.

Form 1099-DA

Brokers and exchanges are now required to issue Form 1099-DA to taxpayers and the IRS for cryptocurrency transactions. The purpose of this form is to streamline the reporting of digital asset transactions, improve compliance, and close the tax gap. This form will include information about the taxpayer's transactions, making it easier for the IRS to track and verify reported income. Taxpayers should ensure that the information on their Form 1099-DA matches the amounts reported on their tax return to avoid discrepancies and potential audits. This new form will cover transactions involving:

• Cryptocurrencies
• Stablecoins
• Non-fungible tokens (NFTs)
• Tokenized assets such as real estate

The IRS expects you to report when you:

• Sell or exchange cryptocurrencies for cash
• Trade one cryptocurrency for another
• Use cryptocurrencies to pay for goods and services

These transactions must be reported on your annual tax return, whether or not your broker issues a 1099-DA form.

Methods for Basis Calculation

The IRS allows taxpayers to use the First-In, First-Out (FIFO) method to calculate the cost basis of cryptocurrency transactions. This method assumes that the first units of cryptocurrency acquired are the first ones sold. Taxpayers may also use specific identification if they can adequately track and identify individual units of cryptocurrency.

For digital assets such as Bitcoin, Ethereum, or other cryptocurrencies owned prior to January 1^st, 2025, you can calculate and allocate your cost-basis using one of the two safe harbor methods.

• Specific Unit Allocation:
  • Match the purchase price of specific cryptocurrencies (or units) to the specific cryptocurrencies being sold. For example, if you bought Bitcoin at two different prices, you could identify which units you are selling based on your records.
• Global Allocation:
  • If you do not have detailed records, your cost basis is pooled across all your assets and applied proportionately to sales.

At the time of the sale, you need to have records showing the total number of assets in your accounts, their purchase costs, and when they were acquired. The safe harbor rules do not apply to digital assets bought after January 1, 2025. Once you allocate cost basis under either of the two safe harbor methods, it cannot be reversed. If the IRS audits you, these records must be detailed and accurate. More details on the safe harbor methods can be found in Bulletin No. 2024–31 .

Simplified NFT Reporting

If you are an NFT collector or trader, the IRS’s new simplified reporting system, starting in 2025, makes reporting smaller transactions easier. Instead of reporting every single NFT sale, you can combine them under one entry using aggregate reporting if the NFTs meet certain requirements. The Eligible NFTs (called “specified NFTs”) must:

• Be indivisible (for example, you cannot break it into smaller parts).
• Have a unique digital identifierthat tracks ownership.
• Not reference or give you rights to things like stocks, commodities, or other non-NFT assets.

NFTs will not qualify for simplified reporting if they represent ownership in securities or commodities or have a mix of NFT and prohibited asset features (e.g., a token linked to both digital art and company stock). This helps casual NFT traders focus on proper reporting without being overwhelmed by hundreds of small, individual sales.

6. Recordkeeping Requirements

As for everything with taxes, taxpayers must maintain detailed records of all cryptocurrency transactions. This includes:

• The date of acquisition and sale.
• The fair market value of the cryptocurrency at the time of the transaction.
• The cost basis and any associated fees.

Accurate recordkeeping is essential for calculating gains and losses and ensuring compliance with IRS regulations.

9. Tax Planning for Cryptocurrency Investors

Given the complexity of cryptocurrency taxation, taxpayers should consider proactive tax planning strategies, such as:

• Tax-Loss Harvesting: Offset gains by selling underperforming digital assets at a loss.
• Holding Periods: Take advantage of long-term capital gains rates by holding assets for more than one year.
• Charitable Contributions: Donate appreciated cryptocurrency to qualified charities to avoid capital gains taxes and claim a charitable deduction.

Conclusion

The new filing requirements for cryptocurrency and digital assets reflect the IRS's commitment to ensuring compliance in this rapidly evolving space. As digital assets grow in popularity, the IRS aims to ensure proper reporting and increase transparency. These new requirements will not only make it easier to complete your taxes but also help you stay compliant and avoid penalties.

For more information , taxpayers can refer to the IRS's official guidance on cryptocurrency taxation IRS Digital Asset Reporting Resources or consult the relevant sections of the U.S. Code, such as 26 U.S. Code § 6045 and 26 U.S. Code § 6038D.