7724 / How does a taxpayer report a transaction in which bitcoin or other virtual currency is involved?

The IRS now asks about cryptocurrency transactions on taxpayers’ Form 1040 federal income tax returns. The IRS’s question asks the taxpayer if they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during the tax year.  Every taxpayer must answer either “yes” or “no.”  Taxpayers must check "yes" if they (1) received digital assets as payment for property or services provided, (2) received digital assets resulting from a reward or an award, (3) received new digital assets resulting from mining, staking and similar activities, (4) received digital assets resulting from a hard fork (which is defined as a branching of a cryptocurrency's blockchain to split a single cryptocurrency asset into two), (5) disposed of digital assets in exchange for property or services, (6) disposed of a digital asset in exchange for another digital asset, (7) sold a digital asset, or (8) otherwise disposed of any financial interest in a digital asset.¹

However, the IRS also released guidance clarifying that taxpayers who purchased cryptocurrency with “real” currency are not required to answer the question with a “yes” if they had no other cryptocurrency transactions during the tax year because a taxpayer who merely owns cryptocurrency is not taxed on any gains or losses until they sell or otherwise exchange the cryptocurrency. In other words, there has been no realization event that would trigger tax liability.

Dispositions of bitcoin as property must be reported to the IRS in the same manner as any other intangible property transactions, meaning that the taxpayer will be required to complete and file Schedule D and Form 8949, or Form 4797, to report the transaction in accordance with the instructions to those forms. The reporting requirements do not vary because the property transferred is bitcoin.² Each bitcoin trade should be reported separately.

The IRS released regulations³ that require brokers to report sales and exchanges of cryptocurrency and digital assets to the IRS. Information reporting under IRC Section 6045 would be extended to cover brokers who act as agents, principals or middlemen in selling digital assets to others. The regulations are broad and cover transactions where cryptocurrency is sold for cash, broker’s services or any property that is subject to reporting by brokers. Brokers who handle payments of cryptocurrency via payment card and third-party network transactions would also be subject to reporting under IRC Section 6050W. Under Section 6045, the definition of “broker” includes digital asset trading platforms, digital asset payment processors, digital hosted wallet providers, and parties who regularly offer to redeem digital assets that were created or issued by that person. Brokers will be required to report sales and exchanges of cryptocurrency on new Form 1099-DA for 2025 transactions beginning January 1, 2026. Depending on the facts, brokers may also be required to provide basis information with respect to gain or loss for sales that take place on or after January 1, 2027 (to allow individuals access to information necessary to report such gain or loss on their federal tax returns).

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Planning Point: Taxpayers who trade in various types of cryptocurrencies should be reminded that each trade is a taxable event. Further, IRS guidance has confirmed that pre-2018 exchanges of bitcoin, ether, and litecoin do not qualify for Section 1031 exchange treatment under pre-2018 law (post-tax reform, Section 1031 is limited only to exchanges of real property). The IRS’s rationale is that these were not exchanges of like-kind property and so were taxable even prior to tax reform. The IRS found that bitcoin and ether each played special roles in cryptocurrency trading because if taxpayers wanted to trade in other types of virtual currency, they had to first exchange the other currency into or from bitcoin or ether. Therefore, exchanges between Litecoin and bitcoin/ether did not qualify as “like kind.” Further, the IRS identified differences in design, intended use and actual use of bitcoin and ether. While this guidance currently only extends to exchanges involving bitcoin, ether, and litecoin, it is possible that the IRS could extend the rationale to other types of cryptocurrencies.

For many taxpayers, the pre-2018 three-year statute of limitations may have expired if the return was filed on time. However, a special six-year limitation period applies if taxpayers fail to report more than 25 percent of their income, meaning that taxpayers with substantial cryptocurrency gains in earlier years may remain exposed to tax liability, interest, and penalties.⁴

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As discussed in Q 7725, employers that pay employees in bitcoin are required to report those payments as taxable compensation on Form W-2, and employers that pay independent contractors in bitcoin are required to report those payments on Form 1099-MISC.

While the treatment of bitcoin or other virtual currencies for U.S. taxpayers with foreign accounts who are required to file FinCen Form 114, Report of Foreign Bank and Financial Account, is unclear following guidance allowing its exclusion in 2013 only, these individuals should include bitcoin unless they have a clear reason to exclude it.