Taxation of Cryptocurrency and Other Digital Assets

What reporting requirements apply to digital asset transactions?

Generally, there are two types of reporting requirements involving digital assets:

1. Taxpayers must report income resulting from digital asset transactions.
2. Brokers must report information involving digital asset sales, exchanges, or transfers completed on behalf of their customers.

1. Taxpayers must report income derived from digital asset transactions

All income resulting from digital asset transactions must generally be reported on one of the following forms:

• Form 1040, Individual Income Tax Return
• Form 1040-SR, U.S. Tax Return for Seniors
• Form 1040-NR, U.S. Nonresident Alien Income Tax Return
• Form 1041, U.S. Income Tax Return for Estates and Trusts
• Form 1065, U.S. Return of Partnership Income
• Form 1120, U.S. Corporation Income Tax Return
• Form 1120-S, U.S. Income Tax Return for an S Corporation

Each form essentially asks taxpayers whether they, at any time during the taxable year, either:

1. Received a digital asset (as a reward, award, or payment for property or services) or
2. Sold, exchanged, or otherwise disposed of a digital asset (or a financial interest in a digital asset)

The question must be answered “Yes” or “No” by all taxpayers, not just by those who were involved in a digital asset transaction that year. Typically, taxpayers check “Yes” if they did any of the following:

• 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
• Otherwise disposed of any other financial interest in a digital asset

Examples of reporting income from digital asset transactions:

• If a taxpayer disposed of any digital asset that was held as a capital asset through a sale, trade, exchange, payment, or other transfer, the taxpayer must complete Form 8949 to calculate their capital gain or loss and report that gain or loss on Schedule D (Form 1040).
• If a taxpayer received any digital asset as compensation for services or disposed of any digital asset that was held for sale to customers in a trade or business, the taxpayer must report the income as any taxpayer would report other income of the same type (for example, W-2 wages on Form 1040 or inventory or services on Schedule C).

2. Brokers must typically report information on digital asset sales, exchanges, or transfers effected on behalf of customers

The Infrastructure Investment and Jobs Act of 2021 clarified and expanded the rules mainly under §6045 of how brokers must report information on certain digital asset transactions. The IRS issued proposed and final regulations implementing those rules.

The final regulations under §6045 require U.S. custodial brokers to make information returns and furnish payee statements for certain sales and exchanges of digital assets by filing soon-to-be-released Form 1099-DA, Digital Asset Proceeds From Broker Transactions.

A broker is any person who in the ordinary course of a trade or business stands ready to effect sales made by others. Digital asset brokers include:

• U.S. custodial digital asset trading platforms
• U.S. processors of digital asset payments
• U.S. digital asset-hosted wallet providers
• U.S. digital asset kiosks

U.S. real estate reporting persons facilitating real estate transactions in which digital assets are paid by the buyer in full or partial consideration for the real estate are also digital asset brokers.

On Form 1099-DA, brokers must report gross proceeds on certain sales of digital assets effected for customers beginning for sales of digital assets effected on or after Jan. 1, 2025. Brokers must report basis for those transactions occurring on or after Jan. 1, 2026, but only for digital assets the customer acquired from, and held with, the same broker on or after Jan. 1, 2026. Also, for dispositions of digital assets for real property, brokers must report certain information on those transactions on or after Jan. 1, 2026.

The IRS issued transitional guidance and penalty relief generally for calendar years 2025 and 2026 regarding certain digital asset broker information reporting requirements and for the payment of backup withholding tax required to be withheld, as well as from penalties for brokers who fail to pay that tax for such reportable sales of digital assets.