Federal Cryptocurrency Tax Compliance in 2024: What Investors, Miners and Others Need to Know

The Internal Revenue Service (IRS) is continuing to prioritize cryptocurrency-related compliance in 2024. As we previously discussed, the IRS identified digital asset compliance as one of its three “priority areas” for enforcement in 2024, and it recently issued a News Release reminding U.S. taxpayers of the obligation to report cryptocurrency transactions on their annual returns.

For investors, miners and other taxpayers with significant cryptocurrency holdings and transaction histories, noncompliance presents substantial risks. This includes not only the risk of civil liability for back taxes, interest and penalties, but also potentially the risk of criminal prosecution. Here, Texas IRS lawyer Lawrence Brown explains what high-income and high-net-worth taxpayers need to know about federal cryptocurrency tax compliance in 2024:

Most (But Not All) Cryptocurrency Transactions Trigger Reporting Requirements and Potential Federal Income Tax Liability

When it comes to federal income tax compliance, the rules regarding cryptocurrency remain largely unchanged in 2024. Taxpayers living both in the U.S. and abroad must continue to answer the “digital asset question” that appears on nearly all versions of IRS Form 1040, and they must report all taxable cryptocurrency (and other digital asset) transactions. As the IRS explains in its January 22, 2024 News Release, taxpayers generally have reporting obligations if they:

• Received cryptocurrency (or other digital assets) as payment for property or services rendered
• Exchanged any digital assets for property or services
• Exchanged any digital assets for other digital assets
• Received any digital assets from mining, staking or other similar activities
• Received any digital assets as the result of a hard fork
• Received any digital assets as a reward or award
• Sold (or otherwise disposed of) any digital asset or any financial interest in any digital asset

While this covers most types of cryptocurrency transactions, there are certain types of transactions that do not trigger potential federal tax liability. For example, as the IRS’s Taxpayer Advocate Service explains, the following transactions “are not taxable”:

• Transfers of cryptocurrency between wallets, addresses and accounts that you own
• Receiving a bona fide gift of cryptocurrency (“[y]ou will report any income or loss when you sell, exchange, or otherwise dispose of the digital asset”)
• Donating cryptocurrency to a qualifying charitable organization (while “you will not report income, gain, or loss from the donation,” you may be entitled to a deduction)
• Soft forks that do not result in the creation of new cryptocurrency

Along with filing federal income tax returns, U.S. taxpayers who hold cryptocurrency offshore may need to make additional filings in order to properly disclose these “foreign financial assets” to the government. Federal offshore disclosure requirements exist under both the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA). While the Financial Crimes Enforcement Network (FinCEN) has stated its intent to adopt regulations applying the BSA’s disclosure requirements to foreign cryptocurrency accounts, it still has yet to do so. As a result, foreign accounts that exclusively hold cryptocurrency are not subject to the BSA’s disclosure requirements in 2024. However, taxpayers may still need to report their foreign cryptocurrency accounts to the IRS under FATCA.

From storing adequate transaction records to calculating basis, gain and loss, maintaining federal cryptocurrency tax compliance presents numerous challenges for high-volume traders, miners and other taxpayers. However, these challenges are not excuses for non-compliance. As mentioned above, the IRS is prioritizing cryptocurrency-related tax compliance in 2024, and since the IRS has now made guidance available for several years, it is taking a heavy-handed approach to enforcement.

Dealing with Past Federal Cryptocurrency Tax Violations

In addition to meeting their federal tax reporting and payment obligations for the 2023 tax year, many taxpayers will also need to address past federal cryptocurrency tax violations in 2024. Taxpayers who have underreported their cryptocurrency holdings or underpaid their cryptocurrency-related tax liability cannot simply ignore these mistakes going forward. IRS audits can go back up to six years in most cases, and criminal enforcement proceedings can potentially go back even farther. While taking a “wait and see” approach might seem prudent, the consequences of having the IRS uncover cryptocurrency-related tax violations can be far greater than resolving these tax controversies proactively.

The steps taxpayers need to take to resolve past cryptocurrency-related tax violations depend on the specific circumstances involved. In some cases, filing an amended return can be sufficient. In others, taxpayers may need to consider submitting a voluntary disclosure in order to avoid potential criminal liability. Taxpayers can often settle their cryptocurrency-related tax debt with the help of an experienced Texas IRS lawyer, and an experienced lawyer will be able to help you choose your best path forward.

Defending Against a Cryptocurrency-Related IRS Audit or Tax Evasion Investigation

If it is too late to resolve your past cryptocurrency-related tax mistakes proactively, you will need experienced counsel in this scenario as well. The IRS is actively targeting cryptocurrency investors, miners and other taxpayers in audits and investigations in 2024. These inquiries can present risks for significant liability—along with the risk of federal incarceration in some cases.

In many (but not all) cases, working with the IRS to achieve a mutually agreeable resolution will be best. Even in cases involving egregious tax law violations, the IRS will often be willing to settle. Of course, if the IRS’s inquiry is misguided, then you should not agree to pay taxes, interest or penalties you don’t owe. At Brown Tax, P.C., our lawyers can examine your compliance history, assess your risk, and execute a strategy focused on mitigating your liability and ongoing risk as fully as possible.

Request a Confidential Consultation with a Texas IRS Lawyer at Brown Tax, P.C.

At Brown Tax, P.C., we represent high-income and high-net-worth U.S. taxpayers in significant cryptocurrency-related federal tax matters. If you need advice about cryptocurrency tax compliance, remedying past reporting or payment violations, or dealing with the IRS, call 888-870-0025 or send us a confidential message online to request a confidential consultation with a Texas IRS lawyer at Brown Tax, P.C.