The Investment in Infrastructure and Jobs Act (HR 3684) puts cryptocurrencies in the spotlight, with Congress and the Internal Revenue Service (IRS) hoping to collect huge amounts of money in taxes. This reporting regime is projected to generate a staggering $ 28 billion over the next ten years. No other provision in this huge, recently enacted federal law is supposed to produce tax dollars that come close. If you don’t think that means the IRS is coming for your cryptocurrency in a big way and that Congress is working hard to make it easy, think again.
The crypto community was outraged when the measure was first proposed and tried to strongly oppose it. That effort resulted in some reductions, but the provisions were enacted anyway. Some people keep talking about a repeal effort, but that could prove a tough sell when $ 28 billion that the Biden administration might need is at stake. As promulgated, Form 1099 and other reporting standards do not go into effect until December 31, 2023. Still, since Form 1099 reports are made in January for the prior year. That means 2023 will be a great fiscal year.
And with 2022 just around the corner and 2021 tax returns due shortly after, it’s a good time to get your tax affairs in order. The new key questions are if you are a broker, and who is. And how will these onerous reporting standards be applied? With possible civil and even criminal penalties, you can bet that most exchanges, and others who may have doubts as to whether they are brokers subject to the new law, will resolve any doubts in favor of the statement. Surprisingly, what exactly constitutes being involved in a trade or business can be an open question as well.
The IRS keeps saying that a lot of people aren’t reporting their cryptocurrencies, but more reporting inevitably means a lot more compliance, worth $ 28 billion. The definition of a broker under section 6045 of the tax code now includes:
“Any person who (in exchange for a consideration) is in charge of regularly providing any service that carries out transfers of digital assets on behalf of another person.”
Digital assets are defined as “any digital representation of value that is recorded in a distributed ledger with cryptographic security or in any similar technology, as specified by the Secretary [del Tesoro]”Digital assets are now specified securities that are subject to declaration on IRS Form 1099-B. It is the same form that stock brokers use to report share sales if any Amazon or other stocks are sold.
The new law gives the Treasury Department and the IRS the ability to write regulations on these new rules. There are rules from broker to broker and others.
Declaration of more than USD 10,000 in cryptocurrencies
The broker’s report on the 1099-B form pales in comparison to the new requirements of the cash report form with its staggering criminal liability. In 2014, the IRS announced that it would treat crypto as property, not money. The repercussions of that rule on your taxes are enormous. That is the reason why almost every successive transfer or trade in crypto (even for another crypto) triggers more taxes. Yet ironically, Congress and the IRS are taking a page of information on cash.
For decades, transactions of more than $ 10,000 in cash have required any business to file an IRS Form 8300 within 15 days to report the cash transaction to the IRS. If you buy a car with more than $ 10,000 in cash, the dealer has to let you know. If you go to the bank and take out your USD 10,001 in cash, the bank is obliged to inform the Treasury. If you pay an advisor with more than USD 10,000 in cash, the advisor must inform the Treasury.
If you make smaller successive withdrawals or payments to avoid cash reporting, that is “structuring” your transactions to evade the rules, and is itself a federal crime. Many people have been caught by this rule, trying to cover up some embarrassing but legal payments, and have inadvertently committed a crime, been convicted of a felony, fined, and then jailed for up to five years. Whether it’s by structuring or ignoring the rules, you don’t have to fiddle with these cash reporting rules.
The bank, merchant or person in question must fill in the person’s full name, date of birth, address, Social Security number and occupation. And now, Congress and the Treasury require this form for cryptocurrencies as well. In its modified version, the new law redefines “cash” to include “any digital representation of value” that involves a distributed ledger technology, such as blockchain. In an anonymous system, will this work?
Beginning January 1, 2024, a cryptocurrency transaction can trigger the filing of Form 8300 when any “person” (including an individual, business, corporation, partnership, association, trust, or estate) receives digital assets in the course of a trade or business with a value greater than USD 10,000. The valuation is done on the day of receipt, and as in everything related to cryptocurrencies, the valuation matters a lot. Again, structuring transactions into smaller receipts to avoid reporting is a crime. And since receipts must be aggregated if they are related to a series of connected transactions, virtually any receipt for digital assets is potentially reportable, regardless of dollar value.
Of course, the Treasury’s interest in cryptocurrencies is nothing new. Everyone is already obliged to declare the profits of cryptocurrencies to the Treasury. There is even a question “Do you have cryptocurrencies?” on every IRS 1040 or individual income tax return now. It is often compared to the question “do you have a bank account abroad?” listed on Schedule B, and which has resulted in many criminal convictions for the IRS, and large civil penalties.
The new requirements are extensive. And although there is a grace period until December 31, 2023, many changes will be necessary to make them appropriate and applicable. The new law requires that the recipient of more than $ 10,000 in cryptocurrencies who has a commercial activity must collect, verify and report the sender’s personally identifiable information within a period of 15 days. If you don’t, you can face fines and even criminal liability.
Saying that you are an investor and not in business may sound appealing if you have strong arguments to that effect. However, there is a huge body of tax law on that subject, with some discernible rules, and the stakes are high. Will all this be easy in what is usually an anonymous peer-to-peer system? Probably not, but it is likely that there is fear of the new rules and that a certain degree of request is presented for prevention rather than regret.
This article is for general information purposes and is not intended and should not be construed as legal advice.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Robert W. Wood is a tax attorney representing clients around the world from Wood LLP’s San Francisco office, where he is a managing partner. He is the author of numerous books on taxes and writes frequently on taxes for Forbes, Tax Notes, and other publications.