Rhode Islanders who own cryptocurrency may be sitting on a tax surprise waiting to surface.
That’s because the IRS treats digital assets not as cash but as property, meaning profit from any crypto sale, trade or purchase could create a taxable event – and unreported gains could lead to costly back taxes and penalties.
And while crypto ownership has gained in popularity, the tax reporting isn’t keeping up. Roughly 14% of U.S. adults report owning some form of cryptocurrency, and 17% of investors – adults with $10,000 or more invested in stocks, bonds or mutual funds – say they own cryptocurrency, according to a June Gallup survey. That compares with 2% of investors owning bitcoin, specifically, in 2018, which increased to 6% in 2021, according to Gallup.
More than 2.78 million Americans reported actively participating in cryptocurrencies, according to an Oct. 20 SmartAsset article, which cited IRS data for tax year 2022, the latest year available. Using that data, SmartAsset ranked all 50 states to see which have adopted cryptocurrencies at the highest rates. Rhode Island ranked No. 25, with a 1.59% adoption rate, or 9,030 households. Washington state ranked No. 1 at 2.43%, with 91,310 households.
Now, local accounting firms such as Warwick-based DiSanto, Priest & Co. are helping investors navigate complex IRS rules and are expanding services to include crypto bookkeeping as the state’s accounting sector rapidly adapts to the evolving digital asset market.
“I’ve definitely seen a crypto boom,” said Katie McIntosh, a DiSanto Priest partner. “It started as something clients might ask about once in a while, but now it’s a regular part of tax season.”
But behind the boom lies a costly misunderstanding: many crypto holders file taxes as if their cryptocurrency were cash to spend freely, not realizing that each transaction can create tax liabilities. That confusion is creating headaches for accountants and potentially expensive surprises for taxpayers.
McIntosh said she’s noticed more clients receiving 1099 forms from crypto exchanges – forms that report income that is not from traditional employer-employee relations, but those reports don’t always tell the full story.
“The real gap happens when people buy or sell on third-party sites,” she explained. “They might not realize they still need to report those transactions.”
She said apps such as PayPal and Cash App, which now allow users to buy and sell bitcoin and other digital assets, are often part of the problem.
“You can buy bitcoin with your debit card now,” McIntosh said. “When you convert it back to U.S. dollars, that’s a taxable event – and people miss that. It’s rarely intentional underreporting; it’s mostly a lack of education.”
Every profitable crypto transaction is taxable at both the federal and state levels and treated like profits from real estate, stocks or bonds.
At the federal level, that income is taxed as either short-term (up to 37%) or long-term (up to 20%) capital gains, depending on how long the asset is held. In Rhode Island, those gains are also taxed at rates up to 5.99%.
Mistakes can be costly, McIntosh said. The IRS can impose accuracy-related penalties of 20% on unpaid taxes, plus interest.
Even late payments can rack up monthly penalties, making careful record-keeping essential for crypto investors.
McIntosh said DiSanto Priest has added a question about “digital asset activity” to its standard client intake forms.
“It gives us a chance to dig deeper and ask the right questions,” she said. “It’s something a less-sophisticated taxpayer could easily miss.”
She also pointed out that many clients don’t realize they may not be able to claim a loss even if a cryptocurrency becomes worthless.
“Some projects have great backing and still go to zero,” she said. “But under current law, investors get no meaningful tax benefit from that.”
Amid these tax reporting challenges, one Rhode Island lawmaker has been working to simplify daily crypto transactions.
In February, Sen. Peter A. Appollonio Jr., D-Warwick, introduced a bill that would let residents and businesses make up to 10 bitcoin transactions per month – each under $1,000 – without incurring state capital gains taxes.
The bill stalled in the Senate Finance Committee, leaving Rhode Islanders still subject to state capital gains taxes on all bitcoin transactions, regardless of size or frequency.
Still, Appollonio said the issue remains urgent as digital assets continue to gain traction statewide.
“This is a technology we cannot simply ignore,” he said. “It’s new, it’s evolving, and it’s important that we take the time to study it carefully while positioning Rhode Island to adapt responsibly.”
McIntosh agreed that the idea of simplifying small transactions was “great in theory,” but she said tracking it would be nearly impossible in practice.
“Big brokerage houses can easily report that data on a 1099,” she said. “But smaller third-party sites might just send you a spreadsheet. You’d have to go line by line to prove which transactions were under the limit each month – that’s administratively almost impossible.” n
