Cryptocurrency Holders Cash In on Bitcoin Surge, But Beware of the IRS

As the value of Bitcoin surges to new heights, many cryptocurrency holders are cashing in on their investments. However, it's essential to remember that the Internal Revenue Service (IRS) is paying close attention to these transactions.

A Warning to Cryptocurrency Holders

Some Bitcoin owners are making gifts to friends and family or donating coins to charity, while others are selling parts or all of their holdings, reaping huge returns.

The IRS is Watching

However, it's crucial to note that the IRS considers cryptocurrency as property for tax purposes, and any taxes owed will need to be paid. Tax audits and criminal cases are becoming more common, and new rules starting next year will provide the IRS with even more information about your crypto holdings.

Cleaning Up Your Digital Books

"The thing to do now is to clean up your digital books and records," advises Mark Howe, a tax lawyer specializing in financial products at Cadwalader, Wickersham & Taft in Washington, D.C. "The reporting is coming."

Tax Implications of Crypto Sales

Crypto sales are taxable, and the IRS treats them as property. This means that the rules for gains or losses work similarly to those for stocks. If cryptocurrency is held in a taxable account, net profits from sales are typically taxed as long- or short-term capital gains.

Tax Treatment of Crypto Transactions

When using cryptocurrency to buy something, a taxable event is generated, which the buyer must report to the IRS. For tax purposes, the IRS considers crypto as property, and sophisticated cryptocurrency investors are particularly at risk of difficult audits.

Harvesting Losses

However, there is a benefit to this type of tax treatment. If Bitcoin and other cryptocurrencies plunge, taxpayers can look for opportunities to harvest losses.

Enforcement is Real

Since 2019, the IRS has required taxpayers to check a box on their tax return to indicate whether they received or disposed of cryptocurrency. However, there are many gray areas in crypto taxation, and the industry and taxpayers may face challenges from the government.

New Rules and Regulations

For the 2025 tax year, brokers will have to report sale proceeds to the IRS for crypto held in a taxable account. The first of new forms, Form 1099-DA, will be used to report these sales.

Charitable Donations

Tax rules allow individuals to be generous with their cryptocurrency.

As the value of Bitcoin continues to surge, it's essential to remember that the IRS is watching. Cryptocurrency holders must be aware of the tax implications of their transactions and take steps to ensure they are in compliance with tax laws.

-CD