Due to the extreme volatility of the market, you may have realized sizeable gains or losses from sales of Bitcoin or other cryptocurrency holdings in 2023.
Strategy: You must report your gains or losses on your 2023 Form 1040. There’s a lot of confusion in this evolving area, but the IRS has provided some basic guidance.
Here’s the whole story: The IRS generally considers cryptocurrency—also called virtual currency or digital assets—to be “property” comparable to securities for federal income tax purposes. Thus, if you sold Bitcoin at a gain in 2023, you have a short-term or long-term capital gain, depending on the holding period. Likewise, a loss is treated as a short-term or long-term capital loss. Net long-term capital gains are taxed at a maximum 20% federal rate, although most folks only pay a 15% rate. The federal rate on net short-term capital gains can be as high as 37%. You may also owe the 3.8% net investment income tax (NIIT) on both long-term and short-term capital gains. Gains and losses are netted on your tax return. Then you determine if the final result is a net capital gain or loss. A net capital loss can be used to offset up to $3,000 of ordinary income on your 2023 return. Any excess net loss is carried over to 2024. Caution: The IRS is watching closely. The infrastructure law enacted in 2023 requires brokers to issue 1099s on cryptocurrency sales, beginning in 2023. (Many were already doing so.)
Here are a few hints to help with tax filings.
• Keep detailed records. This includes the basis of your holdings, transaction dates, amounts of gains or losses, etc.
• Answer questions accurately. The IRS asks for information point-blank on your return.
• Reconcile 1099s. As mentioned above, brokers are now required to report information on 1099s you received. Make sure they match your own records.
• Toe the line. Another new rule imposes severe penalties for failing to report annual cryptocurrency transfers totaling more than $10,000. Worst-case scenario: Evaders could even do jail time.
Tip: Stay alert for further IRS pronouncements.