What You Should Know (And Be Afraid Of) About the New IRS Crypto Tax Reporting
The recent rule expands the definition of “cash” to encompass “any digital representation of value,” including cryptocurrencies, but would this function in an anonymous system?
The Infrastructure Investment and Jobs Act (H.R. 3684) already placed cryptocurrency in the sights of Congress and the Internal Revenue Service (IRS), to collect large sums of money. Over the following ten years, this reporting regime is expected to generate $28 billion in revenue. No other component in this large recently enacted federal law is projected to generate anything close to the same amount of tax revenue. If you don’t believe the IRS is after your crypto in a big manner, and Congress is working hard to make it easier, think again.
When the bill was first presented, the crypto family was upset and sought to fight it hard. Although the provisions were narrowed as a result of that effort, they were nevertheless enacted. Some people are still talking about repealing the law, but that could be difficult to sell while the Biden administration is looking for $28 billion. Form 1099 and other reporting standards will not take effect until December 31, 2023, as enacted. Despite this, Form 1099 reports are due in January for the previous year. As a result, 2023 will be a significant tax year.
It’s also a good time to get your tax affairs in order, with 2022 just around the corner and 2021 tax returns due soon after. The key recent questions are whether or not you are a broker, and if so, who is your broker. And how will these onerous reporting requirements be implemented? With the possibility of civil and even criminal penalties, most exchanges, as well as those who may be unsure whether they are brokers subject to the new rule, are likely to clarify any questions in favor of reporting. Surprisingly, defining what it means to be engaged in a profession or business can be a difficult task.
Many individuals are still not reporting their cryptocurrency, according to the IRS, but increased reporting eventually equals a lot more compliance, worth $28 billion. The following items have been added to the definition of a broker under section 6045 of the tax code:
“Any person who (for a fee) is responsible for providing any service that effectuates transfers of digital assets on behalf of another person regularly.”
“Any digital representation of value that is recorded on a cryptographically secure distributed ledger or any equivalent technology as specified by the Secretary [of the Treasury]” is how digital assets are defined. Digital assets are now considered specified securities and must be reported on IRS Form 1099-B. If you sell some Amazon or other shares, you’ll use the same form that brokers use to report stock sales.
The new law empowers the Treasury Department and the Internal Revenue Service to issue regulations governing the new requirements. There are broker-to-broker rules as well as other regulations.
Reporting about cryptocurrency worth more than $10,000
The new cash-like reporting form requirements, with their massive criminal liability, pale in comparison to broker reporting on Form 1099-B. The IRS announced in 2014 that cryptocurrency will be treated as property rather than money. The impact of that rule on your taxes is enormous. That’s why almost every subsequent transfer or exchange of crypto (even for other cryptos) increases taxes. Ironically, Congress and the IRS are now adopting a cash-based reporting system.
For decades, any business that transacts $10,000 or more in cash has been required to file an IRS Form 8300 within 15 days to record the cash transaction to the IRS. If you spend more than $10,000 on a car, the dealer is required to report you. If you go to the bank and withdraw $10,000 in cash on your own, the bank must report you to the IRS. If you pay a consultant more than $10,000 in cash, your consultant is required to file a tax return with the IRS.
If you make smaller withdrawals or payments to avoid the cash report, you’re “structuring” your transactions to get around the laws, which is a federal crime. Many people have been caught by this regulation while attempting to hide certain embarrassing but legal payments, and as a result, they have unknowingly committed a crime, been convicted of a felony, fined, and subsequently imprisoned for up to five years. You don’t want to play with these cash reporting laws, whether it’s for structuring or ignoring the rules.
The person’s entire name, birth date, address, Social Security number, and occupation must be filled out by the bank, merchant, or person in business. Congress and the IRS are now mandating similar forms for cryptocurrency as well. The new law expands the definition of “currency” to encompass “any digital representation of value” that uses distributed ledger technology, such as blockchain. Is this going to work in an anonymous system?
Starting Jan. 1, 2024, any “person” (including an individual, company, corporation, partnership, association, trust, or estate) that receives digital assets in the course of a trade or business with a value exceeding $10,000 may be required to file a Form 8300. Value is done on the day of receipt, and valuation is extremely important in the crypto world. It’s a crime to break down transactions into smaller receipts to evade reporting.
Because receipts must be aggregated if they are tied in a sequence of connected transactions, nearly any digital asset receipt, regardless of financial value, is potentially reportable.
Of course, the IRS’s interest in cryptocurrency isn’t new. The IRS already requires everyone to report cryptocurrency gains. Every IRS Form 1040 or individual income tax return now has a “do you crypto” question. It’s often likened to the IRS’s “do you have a foreign bank account” inquiry on Schedule B, which has resulted in several criminal prosecutions and large civil penalties.
The new rules are far-reaching. Even though there is a grace period until December 31, 2023, various revisions will be necessary to make them fit and relevant. A recipient of more than $10,000 in cryptocurrency who is in business must gather, verify, and report a sender’s personally identifiable information within 15 days, according to the new rule. You could risk penalties and even criminal charges if you don’t.
If you have compelling arguments, claiming to be an investor rather than a firm owner may appear appealing. However, there is a vast corpus of tax law on the subject, with some clear rules, and the stakes are high. Will any of this be easy in a peer-to-peer system that is frequently anonymous? Probably not, although fear of the new restrictions will undoubtedly result in some filing to be safe rather than sorry.