Are You Ready For Crypto Tax Season?

Tax forms 1040, 1099-MISC, and 1099-B are what most U.S. investors need to fill out.

By: Pedro Solimano Loading...

Are You Ready For Crypto Tax Season?

There are only two things certain in life – death and taxes.

With the kick-off of tax season in the United States, cryptocurrency investors now have to deal with the complex and convoluted task of declaring their holdings.

Since 2019, the U.S. Internal Revenue Service (IRS) has begun taking a bigger interest in crypto, adding a checkbox on tax form 1040 for investors to declare whether they have sold, bought, or received a digital asset in the previous year.

IRS Form 1040
IRS Form 1040

“The IRS is taking crypto tax very seriously,” said Shehan Chandrasekera, also known as CryptoCPA, and tax analyst for Forbes. So much so, he told The Defiant, that it is the first question to answer after personal information.

According to Chandrasekera, the IRS considers crypto to be “widening the tax gap,” pushing authorities to clamp down on the industry.

There are a couple of important notes for this tax season: “Hodling,” for instance, is completely tax-free. This means that receiving or buying crypto – and not selling – does not imply the user should pay the government.

Receiving an NFT as a gift, for example, is not taxable unless the receiver sells it.

Chandrasekera posted on Twitter the two different forms – 1099-MISC and 1099-B – that investors are going to encounter, along with encouraging users to download a transaction history report from the platforms they use.

According to Australian financial comparison site Finder, as of Nov. 2023, roughly 15% of Americans own crypto, down from 18% in an earlier Apr. 2023 report. This means more than 38M U.S. citizens own a digital asset, all of whom are required by the IRS to report their investments.

However, understanding the tax landscape in the United States can be difficult, both for investors and the government.

While the number of people using self-custodial wallets is tough to pinpoint, it also relies on people’s willingness to report their holdings. Most centralized exchanges in the United States inform the IRS of transactions made by their customers, but once the crypto gets withdrawn, it falls back on the good faith of holders.

Chandrasekera also referred to a seemingly obvious difference in ideology when it comes to digital assets. “Crypto is decentralized whereas tax is centralized,” he said, a reality he claims is hard to align.

On the other hand, as the tax fraud narrative gets tossed around, the IRS has been intent on cracking down on crypto, a stance shared by many in the higher echelons of power in Washington, D.C.

Declaring taxes in 2024 shouldn’t be too cumbersome, however. There are myriad tax software tools, and many exchanges are equipped to offer transaction history reports to ensure a smooth tax season.

Investors have until Apr. 15 to submit their tax forms and declare their cryptocurrency holdings. Not doing so and subsequently getting audited by the IRS can lead to a $250K fine and up to five years in prison.