The following question now appears on IRS forms 1040, 1041, 1120, 1065, and 1120-S. “At any time during 2024, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
If the answer is yes, you are required to include Form 8949 Sales and Other Dispositions of Capital Assets with your tax return. Whether you are buying digital assets or using them to pay someone else, it is your responsibility to maintain accurate cost-basis information and establish a value for sales. The difference will be either a long-term or short-term gain or loss. The IRS provides the following guidance.
Normally, a taxpayer must check the "Yes" box if they:
- Received digital assets as payment for property or services provided;
- Received digital assets resulting from a reward or award;
- Received new digital assets resulting from mining, staking and similar activities;
- Received digital assets resulting from a hard fork (a branching of a cryptocurrency's blockchain that splits a single cryptocurrency into two);
- Disposed of digital assets in exchange for property or services;
- Disposed of a digital asset in exchange or trade for another digital asset;
- Sold a digital asset; or
- Otherwise disposed of any other financial interest in a digital asset.
The IRS is also requiring that third parties report digital transactions. According to IRS.gov:
The final regulations require reporting by brokers who take possession of the digital assets being sold by their customers. These brokers include operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The majority of digital asset transactions today occur using these brokers. By focusing first on this group, the IRS intends these regulations to cover the greatest number of taxpayers while allowing the IRS and U.S. Treasury Department more time to consider the nuances of transactions involving non-custodial and decentralized brokers.
That last sentence should give pause to anyone trying to hide their digital transactions. The rules also require real estate professionals to report the fair market value of digital assets paid by buyers in real estate transactions with closing dates on or after January 1, 2026.
We shall see how this ultimately plays out. For now, digital assets are a potential tax trap for those who do not pay careful attention.