As 2023 enters its final phase, cryptocurrency investors face a whirlwind of activity that can be exciting, stressful and financially significant. The FTX trial was a high-profile event, with almost all high-ranking officials testifying, including Samuel Bankman Fried himself, and numerous expert witnesses. FTX's stunning collapse, as well as the repeated accusations against Bankman Fried, have done nothing to convince investors of the soundness of cryptocurrency regulation and legislation. With Bankman-Fried found guilty on all charges, all that remains is speculation as to the verdict, which will be announced in March 2024.
Meanwhile, the broader crypto asset scene continues to advance with HSBC.
However, with all of this in mind, tax season is upon us and cryptocurrency investors are once again a topic of conversation and debate. As tax planning and preparation becomes more rapid, cryptocurrency investors should keep a few things in mind.
Charity donation
Given the recent recovery in the prices of Bitcoin and other crypto assets, as well as the fact that 46% of Millennials and 21% of Generation Z own cryptocurrencies, the reality is that contributions to cryptocurrencies will increase. With dozens of institutions offering individuals the opportunity to contribute crypto assets, tax planning for this process will become increasingly important in the future.
When it comes to crypto assets, there is a unique aspect that taxpayers must consider before making contributions and during the tax filing process. Since crypto assets are not considered easily depreciable assets worldwide, this represents another consideration for taxpayers. For contributions of more than $500, taxpayers must complete and file Form 8283. If a taxpayer wishes to donate more than $5,000 in cryptocurrency, the taxpayer must file a tax return that meets IRS requirements or waive the charitable donation.
Information obligations
Aside from the gradual changes in reporting forms for brokers, dealers, and the like, even relatively simple trading and investing in cryptocurrencies can trigger an avalanche of tax form requirements. If a taxpayer disposes of his or her cryptocurrency holdings through trading, bartering, or marketing of those cryptoassets, those transactions and the associated gains/losses must be reported on Form 1040, Schedule D. Additionally, if there is a discrepancy between Form 1099-B (Investor Applications from Exchanges and Trading Venues) and Schedule D, Form 8949 may be required.
Not to mention, the IRS is actively seeking more information from taxpayers by asking about cryptocurrency activity on page 1 of 1,040 and may tax some NFTs at the highest rate due in capital gains or as income. Additionally, the IRS has made its position clear. In addition to the expected $28 billion in tax revenue from cryptocurrencies, the IRS continues to highlight the steps it is taking to ensure better cryptocurrency compliance.
The IRS is focused on cryptocurrencies
The IRS naturally wants to ensure that all U.S. taxpayers are in full compliance with applicable tax laws, but there are areas where the IRS prioritizes enforcement and collection activities. Companies that only pay cash, wealthy individuals and many other sectors of the economy have always been subject to greater scrutiny than usual by the IRS. It's no surprise that cryptocurrencies are the focus of IRS agents and executives.
Notably, the recently launched virtual currency enforcement campaign continues, and after an initial audit, it was found that 75% of US taxpayers were non-compliant with cryptocurrency reporting. In addition to efforts to improve U.S. taxpayer compliance in their domestic transactions, the IRS has identified hundreds of potential non-filers with an FBAR with an average balance of $1.4 million.
Regardless of how cryptocurrency investors view the situation, the IRS is ready to continue and strengthen its cryptocurrency enforcement efforts moving forward.
Tax preparation and planning may not be considered the most attractive part of the cryptocurrency space, but it is important that cryptocurrency investors continue to make it a priority.