2.7 Million Americans Reported Cryptocurrency On Their Tax Return

The number of Americans reporting cryptocurrency on their tax returns has surged, showing both a significant rise in engagement with digital assets and greater IRS scrutiny, according to the latest IRS data.

In 2022, over 2.7 million tax returns claimed receiving or selling cryptocurrency by checking the box on their Form 1040.

The box asks, "At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"

Three key trends mark this evolution: increasing awareness of tax obligations among crypto investors, a heightened IRS focus on digital asset transactions, and market volatility prompting fluctuations in reportable gains and losses.

While crypto assets may have once seemed a niche investment, millions of Americans are now including digital asset activity on their returns, a trend likely to continue as more reporting is available.

Tax Returns Show Crypto Transactions

While 2.7 million tax returns reported cryptocurrency transactions in 2022, that's down from 2021 (which was during the last bull market).

Since requiring a disclosure on Form 1040, the IRS has seen the following number of returns report crypto transactions:

• 2019 - 927,970
  
• 2020 - 2,308,231
  
• 2021 - 6,653,482
  
• 2022 - 2,793,490
  

It's important to note that simply holding cryptocurrency is not reportable - so there may be many more Americans holding their crypto than reported above.

Increasing Compliance Requirements

The dramatic increase in disclosures aligns with new IRS guidance, including updates to Form 1040 that require taxpayers to declare any “virtual currency” activity, whether buying, selling, or trading. 

"We are working to ensure all taxpayers who profit from cryptocurrency understand their obligations and remain compliant,” the IRS stated in a recent report, hinting at more stringent monitoring in the future.

Plus, it's expected that the IRS will begin requiring cryptocurrency exchanges to file a Form 1099-DA for crypto transactions, similar to how stock brokers file a 1099-B for gains and losses.

Final Thoughts

While the allure of crypto investment endures, the steep fluctuations in cryptocurrency prices over recent years have led some to reconsider their positions.

The volume of returns dropped from 2021 to 2022, likely due to the bear market that eroded gains and led to less taxable activity. As Bitcoin and Ethereum faced steep declines in 2022, many investors either held onto their assets or exited entirely, reducing their reportable gains or losses.

Cryptocurrency investors, however, remain undeterred, with a high likelihood that more Americans will report crypto gains in future tax seasons.

The IRS continues to expand its resources on cryptocurrency, and industry analysts expect that the new compliance requirements could drive up reporting numbers. With further guidance expected, particularly as the crypto market stabilizes, more Americans may add cryptocurrency to their portfolios and tax returns.

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