The world of digital assets and cryptocurrency has seen tremendous growth and innovation over the past decade, leading to an array of financial opportunities and complexities. As the adoption of digital assets continues to surge, the IRS and other regulatory bodies have been measured to provide clarity on the taxation of these assets.
Crypto Abandonment and Tax Implications
One topic that has garnered significant attention is the concept of abandoning digital assets such as cryptocurrency and how it intersects with tax regulations. The IRS issued a Private Letter Ruling (PLR) 202302011 on February 1, 2023, which provides insights into the tax treatment of crypto abandonment. While PLRs are not legally binding precedents, they offer a glimpse into the IRS’s current stance on specific issues. In this particular case, a taxpayer inquired about the tax implications of abandoning cryptocurrency assets. In the PLR the IRS found the taxpayer did not meet the requirements for claiming a loss under section 165 of the Internal Revenue Code due to worthlessness or abandonment of the cryptocurrency. The IRS determined that the cryptocurrency still had value, as it was trading on at least one cryptocurrency exchange, and the taxpayer had not taken any affirmative steps to abandon the property. Even if a loss were to be recognized, section 67(g) would disallow miscellaneous itemized deductions for taxable years 2018 through 2025, which would further prevent the taxpayer from claiming a deduction for the loss.
IRS’s Clarification of the Tax Rules
Another hot topic is the IRS’s clarification of the tax rules on staking rewards in Revenue Ruling Revenue Ruling 2023-14. A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties, and regulations. Staking has become a popular way to earn rewards and validate transactions in the digital asset space. The IRS clarified that when a taxpayer receives ownership and control over staking rewards, these rewards must generally be included in the taxpayer’s taxable income. Additionally, the IRS explained that staking rewards and the related income must be valued at their fair market value at the time of receipt.
A significant consideration for investing in digital assets is the complex tax reporting. The Department of the Treasury and the IRS have issued proposed regulations requiring brokers to report digital asset sales, aiming to reduce ambiguity and enhance compliance. Starting in 2025, brokers must report gross proceeds on Form 1099-DA, and additional details for sales after 2026. Real estate-related parties must also report digital asset transactions. The regulations include rules for gain/loss computation, basis determination, and backup withholding. The IRS fielded comments, which will help them finalize regulations over the coming months.
As the digital asset industry continues to evolve, both taxpayers and regulators must adapt to the complexities it presents. Advisors like Withum can help you mitigate tax risk and navigate the ever-changing landscape that is cryptocurrency.