Over the last few years, the Internal Revenue Service has been engaged in a virtual currency compliance campaign to address tax noncompliance related to cryptocurrency use. The IRS’ efforts include outreach to taxpayers through education, audits of taxpayers’ returns and even criminal investigations.
Included by Congress in the Infrastructure Investment and Jobs Act (IIJA) of 2021, cryptocurrency exchanges will be subject to information reporting requirements like those stockbrokers have to follow when a taxpayer sells securities and other assets. These new rules generally apply to digital asset transactions starting in 2023. The first reporting forms related to cryptocurrency transactions will be issued to the IRS and crypto investors in January 2024.
You will start to notice that many if not all, crypto exchanges will request taxpayer-identification numbers (usually a Social Security number), similar to the current application process when opening a bank or brokerage account.
Property transactions, such as the sale of securities, are reported on Form 1099-B. To date, the IRS has not finalized how crypto transactions will be reported, whether on the current version of the 1099-B or a new form that will be created for this purpose. However, like with securities, crypto will be treated as property and sales proceeds, acquisition dates, sale dates, tax basis for the sale, and the character of the gain or loss will be disclosed to you and the IRS. It will be necessary to report the disposition of cryptocurrency when it is sold for cash, used to buy something or traded for another cryptocurrency. But just transferring the currency from an online wallet to an exchange, or vice versa is not a disposition and, therefore, not taxable.
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 stockbrokers, the prior exchange must provide the new exchange with the basis, and purchase dates, just as a stockbroker must when the brokerage firms are changed.
Please note that the above will potentially apply to non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork. The IRS considers these digital assets.
Starting with the 2020 return, the IRS began asking if you engaged in any transaction with digital currencies. By signing the return, you are attesting under penalties of perjury to filing a true, correct, and complete return. Going forward, as crypto exchanges report digital transactions with the IRS, the IRS will match information received against your tax return to verify that you are reporting these accurately.
Currently, when a business receives $10,000 or more in a cash transaction, the business is required to report the transaction on IRS Form 8300, including 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.
If you have questions about crypto transactions, NFTs or reporting, please call Cray Kaiser at (630) 953-4900 or contact us here.