The recent surge in Bitcoin prices has ignited excitement among cryptocurrency enthusiasts, with many cashing in on the significant returns. However, the Internal Revenue Service (IRS) is intensifying its oversight, keeping a watchful eye on crypto transactions as the tax landscape for digital assets tightens.
Bitcoin reached a record high of $98,000 on Monday, up from $70,000 earlier this month. The surge coincides with President-elect Donald Trump’s pro-crypto stance, which includes proposals to reduce regulations on the cryptocurrency sector and establish a national Bitcoin reserve.
This surge has motivated some Bitcoin owners to make financial gifts to friends and family or donate to charitable causes. Others are opting to sell their holdings, reaping substantial profits. A single Bitcoin purchased for $16,000 in 2022 could net gains exceeding $80,000 at its peak value this week.
Despite the gains, experts caution that crypto transactions are far from tax-exempt. “The thing to do now is to clean up your digital books and records. The reporting regime is coming,” said Mark Howe, a tax lawyer specializing in financial products at Cadwalader, Wickersham & Taft in Washington, D.C.
Tax Implications for Crypto Transactions
The IRS treats cryptocurrencies like property, making transactions taxable. Whether selling crypto, purchasing assets with it, or donating it, the taxable implications resemble those of stock trades.
Short-term or long-term capital gains taxes apply to profits from crypto sales in taxable accounts. Similarly, using Bitcoin to purchase goods, such as a luxury car or artwork, triggers a taxable event that must be reported to the IRS.
Conversely, falling crypto values offer taxpayers an opportunity to harvest losses for potential tax advantages, akin to stock market strategies.
Heightened Enforcement and Legal Risks
Since 2019, taxpayers have been required to disclose their involvement with digital assets on tax returns. Enforcement has ramped up, with the Justice Department targeting cases of crypto tax fraud.
One notable case involved early crypto investor Frank Richard Ahlgren III of Austin, Texas, who pleaded guilty in September to underreporting capital gains on a $3.7 million Bitcoin sale and failing to report other transactions.
Mark Howe warns that sophisticated investors face an increased likelihood of IRS audits. Complex scenarios involving crypto lending or blockchain forks further contribute to the gray areas in crypto taxation.
New Rules for 2025
Starting in the 2025 tax year, brokers will be required to report crypto sale proceeds to the IRS, with additional cost-basis information to follow in 2026. These changes aim to streamline reporting and increase transparency.
Charitable Giving Gains Popularity
The recent rally in Bitcoin prices has also encouraged generous charitable giving. Taxpayers can donate up to $18,000 in crypto annually without triggering gift tax obligations. Contributions exceeding this amount require filing a gift tax form, though no taxes are owed unless lifetime exemptions are exhausted.
Charities have also benefited significantly. Fidelity Charitable reported crypto donations reaching $700 million by November 2024, nearly double the total from 2021.
“Giving through a donor-advised fund is gaining in popularity,” said Randy Fox, an estate planner, explaining that this approach allows donors to make a large crypto gift while deferring grant recommendations to specific charities.
As Bitcoin continues to soar, taxpayers and investors alike are urged to remain vigilant, with the IRS’s increasing scrutiny shaping the future of crypto transactions.
