WSJ Your Money Briefing - The IRS Is Stepping Up Enforcement of Tax Payments From Crypto Sales

Episode Date: December 4, 2024

The IRS applies similar rules for gains or losses from cryptocurrency as it does for stocks. Wall Street Journal personal finance reporter Ashlea Ebeling joins host J.R. Whalen to discuss what it means for investors’ tax bills, and crypto-related rule changes the agency is expected to put into effect next year. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Amazon Q Business is the generative AI assistant from AWS because business can be slow like waiting through mud But Amazon Q helps streamline work so tasks like summarizing monthly results can be done in no time Learn what Amazon Q Business can do for you at AWS.com slash learn more Here's your money briefing for Wednesday, December 4th, I'm JR Whalen for The Wall Street Journal Here's your money briefing for Wednesday, December 4th. I'm JR Whalen for The Wall Street Journal. The price of Bitcoin has risen about 37% since election day, and many investors have cashed in on the run-up. The IRS has a clear message.

Be ready to pay up come tax season. IRS enforcement is real. Since 2019, the IRS has required all taxpayers to check a box on their tax return to say yes or no, whether they've received or disposed of a digital asset. They're stepping up oversight and tax audits and criminal cases are happening more often. We'll talk to Wall Street Journal personal finance reporter, Ashley Eblang, after the break. on rates, inflation, and U.S. recession risk. Exchanges on the market impact of AI. For the sharpest analysis on forces driving the markets

and the economy, count on exchanges between the leading minds at Goldman Sachs. New episodes every week. Listen now. The IRS is stepping up enforcement of tax payments due on profits from cryptocurrency sales. Wall Street Journal personal finance reporter Ashlea Ebling joins me. Ashlea, the IRS considers crypto as property. What does that mean for investors? Well, that basically means that crypto rules work a lot like stock rules, the rules for

gains and losses. If you sell crypto for more than you bought it for, you'll owe tax on the gain. If you sell it at a loss, you can use those losses to offset current gains or future gains. And of course, now with Bitcoin nearing 100,000, most people are in the gain territory. What do Bitcoin sellers need to know about how the IRS is approaching taxation on the proceeds they collect? They need to know that IRS enforcement is real.

Since 2019, the IRS has required all taxpayers to check a box on their tax return to say yes or no, whether they've received or disposed of a digital asset. They're stepping up oversight and tax audits and criminal cases are actually happening more often. How is the IRS stepping up enforcement and who's at risk of an audit? I spoke with several tax lawyers who said the real risk is for sophisticated investors

with big gains. Really everybody again has the duty to report their sales, but they're seeing these investors at risk of really difficult audits. And then in extreme cases, the Justice Department's also cracking down on tax fraud in the crypto area. So even when it's not related to another crime like money laundering, so just flat out crypto fraud. There was one recent case in September, an early crypto investor from Texas, he pleaded guilty to filing tax returns that falsely reported his crypto gains of $3.7 million

sale and then he actually failed to report Bitcoin sales on later returns. So once you're in there, if they look at one return, you could have a bigger problem if it's been several years of underreporting or not reporting. Aside from those extreme cases, do some people believe that the sale of Bitcoin is not taxable? That's still, unfortunately, thrown out there at some places in social media, but there's no question about it. If you're selling it, it's taxable. There are gray areas around lending and around forks, which is like a stock split. So some taxpayers have treated those differently and they can face

challenges from the government. And one thing we think is possible that the industry and taxpayers could get some clearer answers on those gray areas with new legislation under the incoming Trump administration and the Republican led Congress. If somebody sells Bitcoin and gives the proceeds to a friend or family member, or to charity, how would that affect their tax liability?

So those are two different scenarios to take the friend or family member first, tax rules allow individuals to be really generous. For 2024, you could give crypto of up to $18,000 to any individual tax free using what's called the annual gift tax exclusion. And then if you give more than $18,000, you have to file a gift tax form with the IRS, but there's still no tax owed,

unless you're like way over your lifetime estate and gift tax exemption of $13.6 million. And then on the charity side, as prices are going up, charities tend to see more donations of Bitcoin. And there's really an incentive to make these charitable donations of crypto when the market's ripping higher like this because the giver gets a tax deduction for the fair market value of the donated cryptocurrency and the charity gets the full value of the contribution. With regard to capital gains, do the same rules apply in that if you hold Bitcoin for less than a year and sell it, you face a higher capital gains tax?

Yeah, that's right. If it's less than a year, then you'd owe at your ordinary income tax rate of up to 37%. If it's long term over the year, then it's capital gains rate. And that can be up to 23.8%, including the 3.8% investments or tax. What changes are expected next year and how the IRS enforces tax payments from Bitcoin sales? If you have a job and you get a W-2 or if you have like freelance income, you'll get a 1099 form or from your brokerage account, you get a 1099 form. So all those forms go to the taxpayer and to the IRS so they can do matching.

With crypto, these new information reporting forms called 1099DA for digital asset. They're going to start going out to individual taxpayers and IRS in early 2026 for the 2025 tax year. And if somebody buys and sells Bitcoin through something like Robinhood, something like E-Trade, they'll get paperwork from that brokerage at the end of the year, right? So that depends on the brokerage. They were trying to put out like the 1099Bs, they're the forms you get for stocks,

but it doesn't match up exactly with what goes on with crypto. So that's why they've come up with these new forms. What kind of crypto related rules has president-elect Donald Trump proposed, and how could that impact Bitcoin owners? Trump during the campaign called for stripping back regulations on the crypto industry and

also for building a national reserve of Bitcoin. There's also the possibility that there could be legislation in Congress to watch out for. There's so much that could happen with the Security and Exchange Commission, how they're looking at crypto and at the IRS. So it's very possible something could happen in the first 100 days. What can buyers and sellers of any kind of crypto do to stay within the rules and avoid any trouble from the IRS? The key thing the tax lawyers I talked to said is to get your digital records in order

and to be prepared for the 1099 DA reporting that's coming. Whether you get an information reporting form or not, you need to be keeping track of your cost basis, what you paid for the Bitcoin and then what you're selling it for and you report it on your tax return. That's WSJA reporter, Ashley Ebling. And that's it for your money briefing. This episode was produced by Ariana Asparu with supervising producer, Melanie Roy. I'm JR Whalen for the Wall Street Journal. Thanks for listening.