Last year the introduction of the Infrastructure Investment and Jobs Act clarified and expanded the rules for reporting of information on digital assets by brokers. The United States Treasury Department and the Internal Revenue Service (IRS) have just announced that brokers are not required to report additional information related to the dispositions of digital assets until final regulations are issued, likely in 2023.
Brokers and taxpayers are still required to comply with existing laws and regulations despite this transitional guidance. Here are some key points to keep in mind when you are completing your 2022 tax return and planning for the 2023 tax year:
Digital assets are considered the same as securities, similar to stocks, bonds, and certain types of commodities in the eyes of the IRS. Therefore, the tax treatment of digital assets is essentially the same as before: you must pay taxes on capital gains.
Also under the IIJA revision to crypto reporting, digital assets valued at $10,000 or more are now treated as “cash” received for any person engaging in a trade or business.
The law states that, “Any person engaging in a trade or business that receives more than $10,000 in cash must file IRS Form 8300 (”Report of Cash Payments Over $10,000 Received in a Trade or Business”).” With this form you are required to report: (1) the name, address, and TIN of the person from whom “cash” was received; (2) the amount of “cash” received; and (3) the date and nature of the transaction.
This new reporting requirement takes effect January 1, 2023. This means that exchanges are not required to send you Form 1099-B until 2024 (for 2023 taxes).
If you happen to be a cryptocurrency (crypto) broker, then your administrative burden has been lightened with this announcement. However, all taxpayers with digital currency transactions and assets must report any income they receive from transactions involving digital assets and answer the related question on page 1 of either Form 1040 or Form 1040-SR.
Crypto investors are also expected to meet the same reporting standards when paying tax and reporting profits and losses to the IRS. The Infrastructure Investments and Jobs Act (IIJA) reporting requirements helped to bring some clarity to how the IRS classifies virtual currency as detailed here:
1. All cryptocurrency exchanges are considered “brokers” similar to traditional investment brokers.
2. The term “digital asset” is defined by the law as “any digital representation of value which is recorded on a cryptographically secure distributed ledger or any similar technology as specified by the Secretary” (H.R. 3684, p. 2421).
Under the IIJA, the reporting requirements will eventually be increased for cryptocurrency exchanges including the mandate to report information to both the IRS and to their customers. Although this is not a widespread practice right now, some exchanges may send you tax forms such as Form 1099-MISC, which only covers the payouts received, not capital gains related to your crypto activity.
The new law states that the following information is required to be reported to the IRS and to customers: (1) name, address, and phone number of each customer; (2) the gross proceeds from any sale of digital assets; and (3) capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).
The legislation does not state what IRS forms cryptocurrency exchanges must send to their customers, but the information contained on Form 1099-B (“Proceeds from Broker”), would seem reasonable.
If you have crypto assets, it’s key to understand your related tax obligations. Penalties for failure to report cryptocurrency activity will cost you. The new law stipulates that exchanges which fail to report the information above will be subject to a $250 penalty per customer, up to a maximum $3 million penalty. While this has not gone into effect yet, it is highly likely that it won’t be long before these changes are fully enacted. This increased scrutiny will no doubt trickle down to the taxpayer level. This means that it is more important than ever to track, manage, and report your crypto activity.
Another best practice for freelancers investing in and dealing with crypto? Conduct your activities with reputable dealers and platforms, so you have a better chance of receiving the reporting documentation that makes it easier to keep in compliance with these new tax laws.