How will new crypto tax regulations affect your investments?

The growing popularity of cryptocurrency has created challenges for the Internal Revenue Service and taxpayers. Tracking and reporting cryptocurrency income, as well as other digital assets such as non-flippable tokens, is not easy for taxpayers and can lead to errors on tax returns. These harmless mistakes can lead to unjustified collection notices, underpayments or overpayments.

Check out: What to do if you owe back taxes to the IRS

Legislation requiring brokers to report crypto purchases and sales to the IRS could generate an additional $28 billion over 10 years, The Wall Street Journal reported. But so far no rules are in place.

While the IRS outlines the correct steps to take when declaring earnings or losses from cryptocurrencies, which are taxed at the capital gains rate, it is not always easy for taxpayers to track gains and losses from crypto and other digital assets. New legislation aims to fix that, but not until early 2026 when it takes effect, according to The Wall Street Journal. And it is pending approval.

So far, the legislation stands as a proposed rule that has not been adopted.

What the new regulations say

Under the new regulations, as reported by The Wall Street Journal, crypto trading platforms will be mandated to issue Form 1099 to investors and the IRS showing gross proceeds from crypto transactions.

Brokers who manage stock and mutual fund portfolios are already mandated to share this information with clients and the IRS. Payment platforms like Venmo and PayPal also issue 1099-K forms when users receive payments for goods and services. PayPal is one of the platforms that already issue crypto profit and loss statements to make it easier for merchants to track their crypto income.

From 2027, under the new legislation, crypto platforms will also have to report the cost basis for assets purchased as far back as 2023. The cost base is the price paid for a digital asset minus any transaction costs.

How does the IRS define digital assets?

As we explore the changing world of crypto-tax, you may be wondering what a digital asset is. The IRS defines digital assets as “a digital representation of value recorded on a cryptographically secured distributed ledger or similar technology.”

In plain language, this includes cryptocurrency, stablecoins and NFTs. Digital assets can be traded, used to pay for goods or services, and converted into other assets, such as other digital assets or fiat money.

How to declare digital asset gains and losses

If you bought and sold digital assets during the tax year, you will need to declare the income as a capital gain. Similarly, losses can be used to reduce your tax liability. Keep careful records of your crypto transactions to ensure you don’t pay more taxes than you have to.

How is crypto taxed?

In January 2024, the IRS and the US Treasury Department issued a notice stating that businesses do not have to report the receipt of digital assets of more than $10,000 within 15 days of receipt. In other words, crypto payments and other digital payments are no longer treated as cash in the eyes of the IRS.

However, taxpayers must still report the receipt of digital assets as income on their tax returns, taking into account the cost basis and any losses. Keep in mind that digital assets received as payment for goods or services are taxed at your normal income tax rate, based on federal income tax brackets. Income tax rates range from 10% to 37%, depending on your adjusted gross income.

If you buy crypto or NFTs, you don’t pay tax on the purchase until you sell it.

However, if you sell crypto or NFTs at a profit, your crypto tax is the same as capital gains tax rates. Short-term capital gains tax is equal to your marginal tax rate based on your income level. In other words, gains from the sale of investments held for less than a year are taxed at your highest rate based on your adjusted gross income.

If you hold your digital assets for more than a year, you will pay tax based on long-term capital gains tax. These rates range from 0% to 20%, based on your taxable income. If you earn less than $44,625 as an individual or less than $89,250 as a couple, you are not subject to long-term capital gains tax on your investments.

Earn between $44,626 and $492,300 as an individual or $89,251 to $553,850 as a couple, and you’ll pay 15% on your earnings. Individuals earning $492,301 or more and couples earning more than $553,851 are taxed at the highest long-term capital gains rate, which is 20%.

Will the new IRS regulations affect your crypto investments?

If you already report your income, gains and losses from cryptocurrency, the new IRS regulations, if approved, will not affect your tax returns or investments. In fact, it can make it easier to track your profit, loss and cost basis for your crypto investments.

However, the potential for error exists. You will need to keep your own records instead of relying solely on the 1099 forms issued by your crypto platform. If you notice a discrepancy, you should immediately report it to your crypto broker and request an updated, accurate form.

Be careful to ensure you report your crypto earnings as reflected on any 1099 forms; otherwise, it could result in an IRS audit. At best, you will receive a CP2000 notice, also known as a sub-reporter inquiry. You may owe additional taxes and possible penalties. You will have 30 days to respond to the notice, either agreeing to the additional income reported or sending documentation that shows it is incorrect.

If you find that the information is correct, you must pay the additional tax by the due date on the notice to avoid accruing interest and penalties.

Bottom line

As of now, and for those filing their taxes by the April 15, 2025 deadline, the new crypto tax regulations should have no effect on how you report crypto transactions on your tax returns.

If the new regulations take effect, it should be easier to track your crypto earnings, losses and cost basis, although you will need to reconcile your own records with the 1099 forms you receive from your crypto broker or trading platforms.