The cryptocurrency world is changing rapidly and its popularity is soaring. In late 2021, the crypto market hit $2.9 trillion – and the IRS is trying to keep up. Those who invest in virtual currency need to be aware the IRS requires individuals to report income and capital gains from cryptocurrency on their 1040 tax form.
In 2020, the agency moved the question about virtual currency to a more prominent position on page 1 of the individual tax form in hopes of reducing any confusion on reporting of virtual currency. The question reads as follows: “At any time during 2021, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The IRS is placing a priority on making sure cryptocurrency exchanges are tracked. It is leveraging data analytics technology and artificial intelligence to sift through billions of transactions in the digital world to assist their investigators in identifying tax evasion with virtual currencies.
Currently no cryptocurrency exchanges are required to report digital asset activity to their investors, but this is set to change as a result of the passage of the Infrastructure Investment and Jobs Act (IIJA) last year.
The new reporting requirements for cryptocurrency exchanges will take effect January 1, 2023, and will affect tax returns filed in 2024. Listed below is a snapshot of the cryptocurrency reporting provisions in the IIJA:
- It expands the definition of brokers who must provide 1099-B. Cryptocurrency exchanges (Coinbase, eToro, Pionex, Robinhood, etc.) are now considered brokers like traditional brokers.
- It expands the definition of digital assets as any digital representation of value which is recorded on cryptographically secured distributed ledger or any similar technology as specified by the Secretary.
- Digital assets are treated like securities, similar to stocks, bonds, and certain types of commodities in terms of capital gains/losses.
- The following information is now 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). We assume they will send a 1099-B like other brokers. The legislation does not specify which IRS forms these exchanges will be required to send out to customers.
- The penalty for failure to furnish correct payee statements is $250 per customer, up to a maximum $3 million penalty.
- A digital asset with a value of $10,000 or more is now classified as “cash.” Any person engaging in a trade or business that receives more than $10,000 in cash (digital assets) must file IRS Form 8300 (“Report of Cash Payments Over $10,000 Received in a Trade or Business”).
If you hold digital assets, or plan on acquiring them before the end of 2022, you should expect the exchange to collect a Form W-9 from you seeking your taxpayer identification information.
Please let us know how we can advise you on this or any other tax matter.
Kristin Ward is a Partner with Antares Group. She can be reached at kward@antarescpas.com.