Dec 5, 2022 - Economy

The IRS is coming for crypto — but it’s complicated

Illustration of a crypto coin glowing atop a pile of receipts

Illustration: Natalie Peeples/Axios

The world of crypto is a new frontier for a host of government agencies — and the IRS is no exception.

Why it matters: Though changes are happening slowly, the agency’s trying to make sure that Americans who dabble in digital assets pay their fair share of taxes — while other regulators grapple with the more existential questions of crypto’s place in our financial system.

State of play: A new law is scheduled to go into effect in 2023 that will make tax filing for investors a bit easier, and cut down on scofflaws. Exchanges and brokerages will be required to report customer information directly to the IRS and to investors themselves (as now happens with stock transactions).

  • Experts say it could get postponed — but it'll happen at some point.
  • Until then, most investors rely on software like CoinTracker and CoinLedger to track investments.

Between the lines: The ongoing crypto winter may have reduced the number of folks with taxable gains this year — but the volatility can complicate the tracking of net gains and losses for tax purposes, especially for those who trade actively, says Charles Kolstad, a partner at Withers who heads the law firm's worldwide cryptocurrency practice group.

Flashback: The agency ramped up enforcement efforts last year and has subpoenaed some exchanges, including Kraken and Circle, seeking customer information this year.

  • "There's a tax force within the agency devoted to this," Kolstad says. "Anyone who thinks that they can get away with not reporting their crypto are fooling themselves."

The IRS is also still trying to update its tax forms to capture all the rapidly evolving digital assets that Americans just may owe taxes on.

  • This year, for the third time, it changed the language on the front page of a common tax form, the 1040.
  • It now asks taxpayers if they've traded, bought or sold any "digital assets" in the past year (according to a draft version released earlier this year) — whereas the 2021 form used the term "digital currency."
  • "I think they're trying to make sure NFTs and the like are covered," says Mark Luscombe, a tax analyst at Wolters Kluwer.
  • Every tax filer must answer yes or no — so there's no excuse of "I had no idea" if you don't pay up.

Worth noting: Some investors have assets locked up at FTX or other bankrupt crypto companies.

  • They won't be able to write off the potential losses on their taxes until the bankruptcy process is over — and that could take years.

The bottom line: Tax season for all kinds of investors might hurt a little more than usual this year — digital assets are no exception.

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