Update: Crypto Investors Face Expanded Reporting Requirements
11.29.2021 | Client Alert
The new massive infrastructure bill was signed into law by President Biden on November 15, 2021, introducing new tax reporting requirements in an attempt to put a bit of a lasso on the wild west of the crypto world.
This act requires cryptocurrency exchanges, and potentially other service providers such as miners and stakers, to file information returns to report transactions to the IRS. It targets these cryptocurrency participants as brokers, defined as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” “Cryptocurrency,” “virtual currency,” or similar words are not specified in the bill. Instead, the bill describes the trading of digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” Presumably, the reason for the definition is to include any other representation of value that may be created, including non-fungible tokens (“NFT”). Currently, the effective date for these reporting requirements is for tax year 2023 with filings in 2024.
For federal income tax purposes, cryptocurrency is considered to be property. From this perspective, the IRS generally treats crypto as a capital asset to be taxed in the same way as any other gain realized on the sale or exchange of such asset.
The new infrastructure bill amended IRC Section 6050I to requires certain receipts of digital assets to be reported on IRS Form 8300. When any person engaged in a trade or business receives more than $10,000 in cryptocurrency, they will be required to file IRS Form 8300, just as if they received more than $10,000 in cash. This form requires disclosure of the sender, along with their TIN and date of birth, as well as other information related to the transaction and must be filed within 15 days of the transaction.
Coinbase president and COO Emilie Choi says these regulations, if not developed with input from crypto innovators and investors, could result in business moving outside the United States2. If that occurs, income tax compliance for crypto transactions could potentially become even more complicated, with international regulations and reporting requirements also affecting investors.
The infrastructure bill also contains potential penalties for brokers of digital assets. Under current law, brokers (such as stock or real estate brokers) are subject to penalties for failure to file required information returns to the government and to the payee, respectively, under IRC Sections 67211 and 6722, each of which impose a $250 penalty per required return. In large volume cases, the penalties may reach up to $3,000,000 per reporter per tax year with a combined $6,000,000 per year cap under IRC Sections 6721 and 6722. Potentially, the penalties may not be capped if the IRS believes that the rules were intentionally ignored. Cryptocurrency participants deemed brokers would be subject to this penalty regime as well.
There are already calls amend specific crypto related items in the infrastructure bill, such as the “Keep Innovation in America Act” proposed by a bipartisan group of Senators. This bill would amend the definition of a crypto broker to include only those that effect sales of digital assets in the course of a trade or business. It would also modify the provision in section 6050 to take effect in 2025, rather than 2023. In addition to technical items, it also calls for a study on the effect of expanding the definition of cash to include digital assets.
With all this uncertainty, the most important thing crypto investors can do is to ensure they are tracking, and reporting when required, all their activity – buying, selling, trading, mining, etc. This can be daunting and time-consuming, especially as many retailers now accept cryptocurrencies such as Bitcoin as a method of payment. Just using a small amount of Bitcoin to pay for a latte at Starbucks creates a taxable transaction that should be reported on an income tax return.
Luckily, there are several apps, such as Cointracker, that can help in tracking crypto transactions. Many of these apps include integration with major exchanges and wallets to automatically track all activity and give access to your tax advisor to calculate gains and losses for tax purposes accurately. In addition, investors in cryptocurrency should look to prior years to find any potential unreported transactions. Again, apps like Cointracker can assist in retroactively tracking crypto investment activity.
Even though this new legislation does not take effect until January 1, 2023, and thus affects returns filed in 2024, it is more than prudent for cryptocurrency exchanges, buyers, and sellers to prepare ahead of what is expected to be demanding information reporting requirements and strict non-compliance penalties.
This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.