New IRS Guidance on Cryptocurrency May Impact Your Freelance Taxes
Jonathan Medows is a NYC-based CPA who specializes in taxes for consultants across the country. His website has a resource section with how-to articles and information for freelancers. https://www.cpaforfreelancers.com/
If you are working with cryptocurrency in your freelance business, the new Department of the Treasury and the Internal Revenue Service proposed regulations requiring brokers to report sales and exchanges of digital assets by customers may impact you.
The proposed regulations clarify the guidance applied to a range of digital asset issues where there have been questions, this includes how brokers report proceeds to the IRS on new Form 1099-DA.
The guidance aligns with the IRS compliance focus on wealthy taxpayers and will ensure that digital assets are not used to hide taxable income.
The proposed revised regulations from the IRS include:
For sales or exchanges of digital assets that take place on or after Jan. 1, 2025, the proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset hosted wallet providers, to report gross proceeds on a newly developed Form 1099-DA and to provide payee statements to customers.
Brokers are also required to include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, on these information returns and statements, so that customers have the information they need to prepare their tax returns.
The proposed regulations require real estate reporting entities such as title companies, closing attorneys, mortgage lenders and real estate brokers, who are treated as brokers for dispositions of digital assets, to report the disposition of digital assets paid as consideration by real estate purchasers in real estate transactions that close on or after Jan. 1, 2025. The reporting requirement includes Form 1099-S for the fair market value of digital assets paid to sellers of real estate in real estate transactions that close on or after Jan. 1, 2025.
These proposed regulations also gain (or loss) computation rules, basis determination rules and backup withholding rules applicable to digital asset sale and exchange transactions and propose many useful definitions.
The new law states that the following information is now required to be reported to the IRS and to customers:
A. Name, address, and phone number of each customer
B. The gross proceeds from any sale of digital assets; and
C. Capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).
D. The legislation does not state what IRS forms cryptocurrency exchanges must send to their customers, however, the IRS has published Proceeds From Broker and Barter Exchange Transactions Form 1099-B for this purpose.
Clearly, the reporting requirements for cryptocurrency exchanges have become more complex. It is critical to make sure that you track and report your transactions accurately or face hefty fines. As an example, penalties for failure to report cryptocurrency activity will cost you. The law lays out that exchanges which fail to report the information above will be subject to a $250 penalty per customer, up to a maximum $3 million penalty.