New Cryptocurrency Reporting Changes

Cryptocurrency is a high-risk investment option sought after by many institutional and individual investors (including Elon Musk). The risk profile is driven by the fact the digital currency is intangible, not insured by a federal institution, and is traded on non-regulated stock markets. Despite these obvious issues, cryptocurrency investments in Bitcoin, Ethereum, and others have reached a market cap of $2.57T. The acceptance of cryptocurrency as a payment option by Philipp Plein, Shopify, Whole Foods, Microsoft, AT&T, and Etsy has only increased its popularity. However, the rules and regulations governing cryptocurrency will soon change thanks to the recently passed Infrastructure Investment and Job Act.  The modifications include reporting cryptocurrency gains on Form 1099-B, new informational reporting when more than $10,000 in digital currency is received, and changes that make cryptocurrency exchanges subject to the same reporting requirements as brokerages. Clearly, the additional rules are designed to build the structure needed to more closely regulate trading and taxation. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Key Reporting Changes

Under new regulations, the traditional reporting requirements for certain transactions involving over $10,000 in cash have been extended to include a new digital asset class. Most certainly, this includes transactions using various cryptocurrency types. This applies to those who receive digital currency valued at $10,000 or more while simultaneously engaged in trade or business. Taxpayers will now be required to use IRS Form 8300 and include the name, address, and other information on who initiated the transaction.

There is also a change that reveals how the IRS intends to tax cryptocurrency transactions in the future. The IRS now defines a digital asset as “any digital representation of value, which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the [IRS].” The new definition makes it clear that cryptocurrency is just like any other stocks, bonds, or commodities traded on an exchange. In other words, the taxation of cryptocurrency is the same as other stocks and will still involve payment of capital gains tax.

Another important change is the definition of a broker which includes “any person who (for consideration) is responsible for providing a service effectuating the transfer of digital assets on behalf of another person.” This means cryptocurrency exchanges such as Coinbase and Binance.US will soon be treated the same as established brokerage firms when it comes to tax treatment and reporting. What this means is digital currency exchanges will be required to use IRS Form 1099-B which is sent by brokers to investors to obtain information on capital gains/losses and other personal financial information.

Penalties

There are significant penalties for non-compliance including civil penalties of up to $3M per year, with much higher amounts if the failure to comply is deemed as willful. In addition, willful non-compliance will be treated as a federal felony which can result in up to 5 years in prison and fines of up to $100,000 per corporation.   

Effective Date

The new regulations do not become effective until January 1, 2023, which means tax filing requirements would not change until early 2024.  Investors should not expect to receive a 1099-B from exchanges until the beginning of 2024 unless early adoption is undertaken.

Contact Us

Cryptocurrency investors in Atlanta and across Georgia should carefully review the new reporting changes to determine the impact on their situation. Although implementation is a few years away it is important to begin documenting key transaction information including gains and losses. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.