Cryptocurrency is undergoing a major transformation in how it is regulated and taxed. Starting in 2025, serious changes will affect how digital asset investors manage their transactions, specifically those utilizing centralized exchanges (CEX). This shift, dictated by new Internal Revenue Service (IRS) requirements, is poised to impact a vast number of cryptocurrency investors, compelling them to adjust their financial record-keeping and tax reporting practices.
Beginning in 2025, transactions carried out through custodial accounts on popular exchanges such as Coinbase, Binance, and Gemini will now be under strict scrutiny by the IRS. This marks a pivotal change, as for the first time, brokers—including trading platforms, wallet providers, and certain types of payment processors—are mandated to report detailed transaction information. These reports will be documented on a new form, the 1099-DA, which will provide comprehensive details about every buy and sell transaction involving digital assets.
What does this mean for investors? Essentially, taxpayers will receive this 1099-DA form in early 2026, which will necessitate its inclusion in their 2025 tax returns. The IRS will already possess this transaction data, presenting an increased risk for those who do not accurately disclose their cryptocurrency-related activities. Anyone failing to reconcile their records with what is reported by the IRS could potentially face significant discrepancies, leading to possible audits or penalties.
Adding another layer of complexity, brokers will not be required to report the cost basis—the original purchase price of a digital asset—until the 2026 tax year. This delay means that taxpayers might find it challenging to calculate their taxable gains accurately when filing their taxes, as emphasized by Jessalyn Dean, the vice president of tax information at Ledgible. Cost basis is crucial for determining the profit or loss on the sale of an asset, and without this information from brokers in 2025, taxpayers may struggle to validate their tax liability accurately.
This uncertainty may encourage investors to take proactive steps in record-keeping, especially as the IRS increases its focus on cryptocurrency transactions. A sound personal accounting method will be essential for accurately determining taxable gains or losses, highlighting the importance of meticulous record-keeping.
It is also essential to consider investors engaging in decentralized finance (DeFi). This demographic will not face IRS reporting until 2027, as platforms like Uniswap and Sushiswap will only report gross proceeds from transactions, lacking the necessary access to original purchase prices to calculate the cost basis. This discrepancy will require those utilizing decentralized protocols to maintain their records vigilantly, as the IRS will not assist in confirming transaction details through third-party reporting, creating further implications for tax compliance.
Moreover, the introduction of spot Bitcoin exchange-traded funds (ETFs) adds additional reporting needs. ETF providers will issue forms like the 1099-B or 1099-DA, indicating not only sales proceeds but also any taxable events tied to the fund’s operations. This variability highlights the importance of investors in ETFs seeking professional advice on potential taxable gains or losses that could arise due to internal fund management activities.
Financial advisors will be particularly valuable for these investors due to the complexities inherent in ETF investments. Lack of awareness around how internal fund actions could affect individual tax liabilities can lead to unanticipated outcomes if an investor is not keeping close track of their status.
As the IRS grapples with the rapid expansion of cryptocurrency and its integration into the broader economy, the shift in tax reporting requirements underscores the growing significance of compliance. To navigate this evolving landscape effectively, investors need to be diligent in documenting all transactions and seeking expert advice where necessary.
With the IRS set to impose transparent reporting requirements, starting to prepare for the 2025 tax season is no longer a matter of choice but a necessity for cryptocurrency investors. It is imperative for those in both centralized and decentralized spaces to remain informed and proactive, ensuring they can adapt to these regulatory changes without falling into pitfalls that could jeopardize their financial well-being.