Tax Information Reporting Requirement for Cryptocurrency Added by Infrastructure Bill

The IRS has been asking for a reporting requirement for cryptocurrency since inception. Over the last 3 years, the IRS has engaged in a virtual currency compliance campaign. This campaign specifically addresses tax noncompliance related to cryptocurrency use. The IRS’ efforts have included outreach to taxpayers through education, audits of taxpayers’ returns and even criminal investigations.

Soon the IRS will have another arrow in its quiver. Thanks to a requirement included by Congress in the Infrastructure Investment and Jobs Act (IIJA) of 2021, cryptocurrency exchanges will be subject to information reporting requirements. Similar to those rules that stockbrokers have to follow when a taxpayer sells stock or other securities.

These new rules generally will apply to digital asset transactions starting in 2023. So the first reporting forms related to cryptocurrency transactions will be issued in January 2024.

Here Are a Few of the Types of Reporting Requirements for Cryptocurrency

Form W-9

Crypto exchanges will gear up for the new reporting requirement by requesting users’ taxpayer identification numbers. If they don’t have a record (usually a Social Security number), they will contact their users for the information. It’s likely they will use IRS Form W-9, Request for Taxpayer Identification Number and Certification. If the taxpayer doesn’t complete and return the W-9 to the requestor, the taxpayer may be subject to back-up withholding. This means the exchange would have to withhold 24% of future transactions and submit the withheld tax to the IRS.

Form 1099-B

We don’t yet know if the IRS will modify Form 1099-B for reporting crypto transactions. 1099-B is the “Proceeds from Broker and Barter Exchange Transactions form”. The alternative is to create a new form. The IRS will then use the reported crypto transaction details to match information reported on a taxpayer’s tax return. These include sales proceeds, acquisition and sale dates, tax basis for the sale, and character of the gain or loss. Those who don’t report their cryptocurrency transactions will be liable for the tax, penalties, and interest. That includes folks who don’t properly report cryptocurrency transactions. In some cases, taxpayers could be subject to criminal prosecution.

Reporting Requirements for Cryptocurrency Treated as Property

Cryptocurrency Treated as Property

Although cryptocurrency may seem like money, to the IRS cryptocurrency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. It’s necessary to report the disposition of cryptocurrency when it is sold for cash, used to buy something or traded for another cryptocurrency. Just transferring the currency from an on-line wallet to an exchange, or vice versa, is not a disposition.

The character of the gain or loss from the transaction depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. Generally, a taxpayer realizes capital gain or loss on the sale or exchange of cryptocurrency that is held as a capital asset. On the other hand, a taxpayer generally realizes ordinary gain or loss on the sale or exchange of cryptocurrency that he or she does not hold as a capital asset. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.

Digital Assets

The IIJA defines a digital asset as any digital representation of value which is recorded on a secured distributed ledger. 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).

Transfer Reporting

Based on the IIJA change, brokers who will need to furnish Forms 1099-B include any platform on which a taxpayer can buy and sell cryptocurrency. These brokers (referred to as crypto exchanges) must report digital asset transactions. And they are responsible for providing any transfer services for the transfer of digital assets on a taxpayer’s behalf.

Of course, not every transfer transaction is a sale or exchange. An example would be transferring cryptocurrency from a wallet at Crypto Exchange #1 to the taxpayer’s wallet in Crypto Exchange #2. In this case, Crypto Exchange #1 will be required to provide relevant digital asset information to Crypto Exchange #2. Such a transaction is not a reportable sale or exchange. Similar to when a taxpayer switches stock brokers, the prior exchange must provide the new exchange with the basis and purchase dates. Similar to how a stock broker provides information when they change brokerage firms.

Business Reporting Requirement for Cryptocurrency

Cash Transaction Reporting for Businesses

Currently when a business receives $10,000 or more in cash in a transaction, the business must report the transaction. Reporting uses IRS Form 8300. This form includes the ID of the person from whom the cash was received. Under the IIJA rules, businesses will be required to treat digital assets like cash for purposes of this reporting requirement. The $10,000 may occur in a single transaction, or a series of related transactions. Transactions between a buyer (or agent) and a seller that occur within a 24-hour period are related transactions.

1040 Crypto Question

Starting with the 2020 tax return, the IRS asks a question that requires a yes or no answer. The draft of the 2021 Form 1040 shows the following question. “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

Once the IIJA crypto reporting requirement is effective, the IRS will know if the taxpayer’s response to the question is correct. Taxpayers should consider that when signing their Form 1040, they are attesting under penalties of perjury to filing a true, correct and complete return. A response contrary to the 1099-B reporting information could lead to unwanted interaction with the IRS.