Cryptocurrency

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Digital assets and taxes: What you need to know
Digital assets and taxes: What you need to know 1200 1200 Noelle Merwin

As the use of digital assets like cryptocurrencies continues to grow, so does the IRS’s scrutiny of how taxpayers report these transactions on their federal income tax returns. The IRS has flagged this area as a key focus. To help you stay compliant and avoid tax-related complications, here are the basics of digital asset reporting.

The definition of digital assets

Digital assets are defined by the IRS as any digital representation of value that’s recorded on a cryptographically secured distributed ledger (also known as blockchain) or any similar technology. Common examples include:

  • Cryptocurrencies, such as Bitcoin and Ethereum,
  • Stablecoins, which are digital currencies tied to the value of a fiat currency like the U.S. dollar, and
  • Non-fungible tokens (NFTs), which represent ownership of unique digital or physical items.

If an asset meets any of these criteria, the IRS classifies it as a digital asset.

Related question on your tax return

Near the top of your federal income tax return, there’s a question asking whether you received or disposed of any digital assets during the year. You must answer either “yes” or “no.”

When we prepare your return, we’ll check “yes” if, during the year, you:

  • Received digital assets as compensation, rewards or awards,
  • Acquired new digital assets through mining, staking or a blockchain fork,
  • Sold or exchanged digital assets for other digital assets, property or services, or
  • Disposed of digital assets in any way, including converting them to U.S. dollars.

We’ll answer “no” if you:

  • Held digital assets in a wallet or exchange,
  • Transferred digital assets between wallets or accounts you own, or
  • Purchased digital assets with U.S. dollars.

Reporting the tax consequences of digital asset transactions

To determine the tax impact of your digital asset activity, you need to calculate the fair market value (FMV) of the asset in U.S. dollars at the time of each transaction. For example, if you purchased one Bitcoin at $93,429 on May 21, 2025, your cost basis for that Bitcoin would be $93,429.

Any transaction involving the sale or exchange of a digital asset may result in a taxable gain or loss. A gain occurs when the asset’s FMV at the time of sale exceeds your cost basis. A loss occurs when the FMV is lower than your basis. Gains are classified as either short-term or long-term, depending on whether you held the asset for more than a year.

Example: If you accepted one Bitcoin worth $80,000 plus $10,000 in cash for a car with a basis of $55,000, you’d report a taxable gain of $35,000. The holding period of the car determines whether this gain is short-term or long-term.

How businesses handle crypto payments

Digital asset transactions have their own tax rules for businesses. If you’re an employee and are paid in crypto, the FMV at the time of payment is treated as wages and subject to standard payroll taxes. These wages must be reported on
Form W-2.

If you’re an independent contractor compensated with crypto, the FMV is reported as nonemployee compensation on Form 1099-NEC if payments exceed $600 for the year.

Crypto losses and the wash sale rule

Currently, the IRS treats digital assets as property, not securities. This distinction means the wash sale rule doesn’t apply to cryptocurrencies. If you sell a digital asset at a loss and buy it back soon after, you can still claim the loss on your taxes.

However, this rule does apply to crypto-related securities, such as stocks of cryptocurrency exchanges, which fall under the wash sale provisions.

Form 1099 for crypto transactions

Depending on how you interact with a digital asset, you may receive a:

  • Form 1099-MISC,
  • Form 1099-K,
  • Form 1099-B, or
  • Form 1099-DA.

These forms are also sent to the IRS, so it’s crucial that your reported figures match those on the form.

Evolving landscape

Digital asset tax rules can be complex and are evolving quickly. If you engage in digital asset transactions, maintain all related records — transaction dates, FMV data and cost basis. Contact your Smolin advisor with questions. This will help ensure accurate and compliant reporting, minimizing your risk of IRS penalties. 

New Report Identifies High Risk Areas Financial Reporting

Don’t Get Caught Off Guard: New Report Identifies High-Risk Areas for Financial Reporting
Don’t Get Caught Off Guard: New Report Identifies High-Risk Areas for Financial Reporting 850 500 smolinlupinco

In July, the Public Company Accounting Oversight Board (PCAOB) published a report highlighting opportunities for improvement when it comes to audits for public companies. 

As private companies experience challenges similar to those of public companies when reporting their financial outcomes, this report may also be useful for internal accounting personnel and external auditors in pinpointing high-risk reporting areas that require extra scrutiny. 

Previous data

The PCAOB examined sections of public companies’ financial statement audits and published those findings in the recent PCAOB Spotlight report, Staff Update and Preview of 2022 Inspection Observations. Several of the discrepancies for 2022 stem from intrinsically complex areas with higher risks of material misstatement. 

The seven most noteworthy statement deficiency areas were: 

  1. Revenue and related accounts
  2. Inventory
  3. Information technology
  4. Business combinations
  5. Long-lived assets
  6. Goodwill and intangible assets
  7. Allowances for loan and lease losses

Auditors should take advantage of this information to outline and perform more effective audits. 

Meanwhile, in-house accounting personnel and managers can leverage these findings to increase the accuracy of financial reporting, reduce the necessity of audit adjustments, and streamline engagement with external auditors.  

Concerns over crypto transactions

Cryptocurrency transactions stand out as an area of particular concern in the PCAOB report.

These transactions may involve:

  • Investing in cryptocurrency
  • Selling or purchasing cryptocurrency in exchange for U.S. dollars
  • Mining crypto in exchange for a “reward” or other payment 
  • Trading cryptocurrency assets 
  • Selling goods or services for cryptocurrency 
  • Purchasing services and goods with cryptocurrency 

Material digital asset holdings and engaging in significant activity related to digital assets create unique audit risks for companies, as demonstrated by the collapse of FTX. 

These risks may be attributed to a lack of transparency regarding the parties engaging in the transactions, as well as the purpose of them. High levels of volatility, fraud, theft, market manipulation, and legal uncertainties also play a role.

To mitigate these risks as much as possible, the PCAOB encourages using specialists and technology-based auditing tools in certain scenarios. 

Key takeaways

Both private and public companies are encouraged to take proactive measures to keep financial reports transparent and accurate, such as: 

  • Ramping up internal audit procedures in the high-risk areas identified by the report
  • Increasing management review and staff supervision 
  • Providing accounting personnel with additional training 

Companies should anticipate that external auditors will want to hone in on these areas and prepare for this by providing extra documentation to back up account balances, reporting procedures, and accounting estimates for high-risk items. 

Have Questions? Smolin can help.

If you need help navigating high-risk audit items or determining how the PCAOB findings may affect your company’s audit process, we’re here for you. Contact the team at Smolin to learn more.

Important Tax News for Investors and Users of Cryptocurrency
Important Tax News for Investors and Users of Cryptocurrency 1275 750 smolinlupinco

If you use or invest in cryptocurrency, you may have seen something new on your tax return this year. And you may soon discover a new form reporting requirements for digital assets. 

Make sure you check the box

Starting from tax year 2022, taxpayers are required to check a box on their tax returns that indicates whether or not they received digital assets as a reward, award, or payment for services or property, or whether they disposed of any digital assets that were held as capital assets through exchanges, sales, or transfers. 

If you check the “yes” box, then you’re required to report all income related to any digital asset transactions.

A new information form for crypto users

According to the information recording rules, all brokers must report transactions in securities to both investors and the IRS. These transactions are reported on form 1099-B. Legislation enacted in 2021 extended these rules to crypto exchanges, custodians and platforms, as well as digital assets like cryptocurrency. 

These new requirements were set to be effective for returns required to be filed, and statements required to be furnished for transactions after 2022, but the IRS has since postponed the effective date until it issues a set of final regulations that provides instructions. 

In addition to extending this reporting requirement to cryptocurrency, the legislation also extends cash reporting rules for payments of $10,000 or more to cryptocurrency. This means that any business that accepts crypto payments of $10,000 or more is required to report those payments to the IRS on Form 8300. The rules apply to any transaction taking place in 2023 and beyond. 

Current rules and new reporting for digital assets

Currently, if you have a stock account, whenever you sell securities, you are issued a Form 1099-B. This form requires your broker to report details of transactions like sale proceeds, relevant dates, and your tax basis for the sale and the gain or loss. 

The 2021 legislation expanded the definition of “brokers” who are required to provide Form 1099-B to include businesses that regularly provide services involving the transfer digital assets on behalf of another individual. Once the IRS finalizes these regulations, any platform where you buy and sell crypto will be required to report digital asset transactions to you and the IRS.

These platforms and exchanges will be required to gather information from their customers so that they can issue Form 1099-B. They will need customers’ names, addresses, and phone numbers; the gross proceeds from sales, capital gains, or losses; and information on whether they were short or long-term proceeds.

It’s important to note that it’s not yet known whether the platforms or exchanges will be required to file Form 1099-B or a new IRS form.

Cash transaction reporting

Under another set of rules that are separate from the broker reporting rules, when a business receives over $10,000 in cash, it is required to report the transaction to the IRS, including the identity of the person from whom the cash was received. This is reported on Form 8300, and for this reporting requirement, businesses will need to treat digital assets the same as cash.

Form 8300 requires reporting information like occupation, address, and a taxpayer identification number. Current rules that apply to cash are usually applied to in-person payment in actual cash. This could make it difficult for businesses to comply with reporting rules when collecting the information needed for crypto transactions.

What you should know

If you’re using a crypto platform or exchange that hasn’t already collected a Form W-9 from you, expect it to do so in the future. Aside from collecting information from customers, these businesses will be required to begin tracking holding periods and buy-and-sell prices of any digital assets in customer accounts.

Stay up to date with Smolin 

If you want to find out how these new tax rules will affect you or your business, contact the knowledgeable professionals at Smolin for more information.

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