The Infrastructure Investment and Jobs Act of 2021 (“IIJA”) was signed into law on November 15, 2021. The IIJA includes IRS information reporting requirements that will require cryptocurrency exchanges to perform intermediary Form 1099 reporting for cryptocurrency transactions. Generally, these rules will apply to digital asset transactions starting in 2023.
Existing reporting rules.
The existing information reporting rules require brokers to provide a Form 1099-B at the end of the year whenever a taxpayer sells stock or other securities. The broker uses the Form 1099-B to report details of transactions such as sale proceeds, purchase and sale dates, cost basis, and character of gains or losses. If you transfer stock from one broker to another broker, the old broker is required to furnish a statement with relevant information such as tax basis to the new broker.
Digital asset broker reporting.
The IIJA expands the definition of brokers who furnish Forms 1099-B to include businesses that are responsible for regularly proving any service accomplishing transfers of digital assets on behalf of another person (“Crypto Exchanges”). Thus, any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.
For transfer transactions of cryptocurrency that is not a sale or exchange, the Crypto Exchange will be required to furnish relevant digital asset information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the Internal Revenue Service. It is anticipated that such return will require generally the same information that is furnished to a broker-to-broker transfer.
For the reporting requirements, a “digital asset” is any digital representation of value which is recorded by cryptographically secured distributed ledger or similar technology. Furthermore, the IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets such as digital artwork.
Cash transaction reporting.
Current rules require a business who receives $10,000 or more in cash in a transaction to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA will require businesses to treat digital assets like cash for purposes of this reporting requirement.
When reporting begins.
These digital asset reporting rules will apply to information reporting that is due after December 31, 2023. For Form 1099-B reporting, transactions occurring after January 1, 2023 will be reported. It unknown if the IRS will refine the Form 1099-B for digital asset nuances, or come up with an entirely new form. Form 8300 reporting of cash transactions will presumably follow the same effective dates. Experts believe that since the reporting provision does not take effect until returns filed in 2024 for year ending Dec 31, 2023, there is a possibility these provisions may change in future legislation. We’ll provide updates as they become available.
Some parting thoughts regarding these changes… If you use a Crypto Exchange, and it has not already been collected from you, expect the exchange to request a Form W-9. Second, the transactions subject to reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. Third, a reporting intermediary may not have perfect information especially when it comes to an entirely new type of reporting. Thus, the first year of the new reporting may be a bit rough. It is important as a taxpayer to keep good records of your cryptocurrency transactions.
If you have any questions or concerns about the digital asset reporting rules, please do not hesitate to reach out to your HM&M advisor.
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