Annual Federal Tax Update
This article is the first part in a series:
A curated list of updates to prepare you for tax season 2023
As digital assets continue to gain prominence, the IRS has provided guidance to clarify the reporting and requirements for taxation of cryptocurrency and non-fungible tokens (NFTs). This guidance is critical for taxpayers and practitioners in ensuring compliance.
Taxation of Cryptocurrency and NFTs
Both cryptocurrencies and NFTs are treated as property for tax purposes.
Transactions involving these digital assets are subject to capital gains tax, similar to other forms of property like stocks or real estate.
Reporting of Transactions
Taxpayers are required to report cryptocurrency and NFT transactions on their tax returns if they have sold, exchanged, or otherwise disposed of the asset.
The IRS Form 8949 (“Sales and Other Dispositions of Capital Assets”) should be used to report these transactions, with gains or losses calculated in a manner akin to other capital assets.
Taxable Events
A taxable event occurs when a cryptocurrency is traded for another currency, used to purchase goods or services, or exchanged for other digital assets, including NFTs.
The exchange of an NFT for another asset or currency is also a taxable event, with the tax calculated based on the gain or loss from the transaction.
Valuation and Basis
The fair market value of the cryptocurrency or NFT at the time of the transaction determines the basis for tax calculations.
Valuation should be based on the asset’s value in U.S. dollars at the time of the transaction, using a reasonable and consistent valuation method.
Record-Keeping
Taxpayers must maintain detailed records of their cryptocurrency and NFT transactions, including receipts, sales, exchanges, and other dispositions.
These records should include dates of transactions, fair market values, and calculation of gains or losses.
Tax Reporting for Hard Forks and Airdrops
Specific guidance has been issued for situations like hard forks and airdrops in the crypto space.
Taxpayers must report income equivalent to the fair market value of the new cryptocurrency received from a hard fork or an airdrop.
IRS Enforcement and Compliance
The IRS is actively monitoring compliance in the area of digital assets.
Increased data analysis and cooperation with global tax authorities are part of the IRS’s strategy to ensure proper reporting and tax payment.
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