Cryptocurrency Tax Update – Proposed Increased Reporting Requirements
Senate Approves Infrastructure Plan: Proposes Increased Reporting Requirements for Cryptocurrency: On August 10, 2021, the Senate passed its bipartisan infrastructure plan. Among the planned proposals are increased reporting requirements to the IRS for cryptocurrency brokers to the IRS, designed to increase transparency for cryptocurrency transactions.
Background on Cryptocurrency
Cryptocurrency is a virtual currency or digital asset. Currently, these assets can be traded on platforms with no reporting requirements – making it difficult for the IRS to keep track of any gains or losses. The agency believes that the lack of reporting on cryptocurrencies or digital assets is one of the contributors to the gap in tax collected versus taxes owed and estimates these amounts could be up to $1 trillion a year. Along with the Treasury Department, the IRS has asked Congress to increase the reporting requirements – and in response, it was added to the infrastructure bill.
Overview of the Proposed New Reporting Requirements
Expected to raise over $28 billion over the next 10 years, the proposed legislation requires transaction data for cryptocurrency to be reported by cryptocurrency brokers. The bill defines a broker as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Originally this definition was broad enough to include cryptocurrency miners and software designers, but Treasury has since clarified that only companies they consider to be brokers will be affected while miners and developers will not be subject to any new requirements.
Along with the proposed new reporting requirements, the bill also:
- Defines digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary”
- Imposes a penalty for failure to file information returns
- Requires brokers to report the basis of digital assets to the IRS for any digital assets transferred to customers or non-brokers
- Requires anyone engaged in a business or trade receiving more than $10,000 in digital assets in one or more related transactions to file Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business” with the IRS
It is important to note that these new reporting requirements are only proposed at this time. The vote on the infrastructure bill is expected to happen September 27, 2021. If signed into law, the new reporting requirements will go into effect after December 31, 2023.
The IRS has had a campaign on virtual currency since 2018. Form 1040, U.S. Individual Income Tax Return, currently includes a question on any involvement with virtual currency. Form 433, Collection Information Statements, which is used to request a payment plan from the IRS, requires that any virtual assets be disclosed. The virtual currency campaign suggests that taxpayers with unreported virtual currency correct their returns as soon as practical since the IRS is not considering a voluntary disclosure program for tax non-compliance. For more information, the IRS has also created a webpage for Virtual Currencies.
If you have questions regarding this article please contact your Herbein + Company, Inc. tax consultant or email us at firstname.lastname@example.org.
Article prepared by Paige Famous.