The rise in popularity of cryptocurrency has resulted in increased reporting requirements and changes to some tax forms. Some of these new requirements have also prompted legislators from both parties to introduce legislation aimed at making the use of digital currencies easier for more people.
Currently no cryptocurrency exchanges are required to report digital asset activity to their investors, but this will change beginning January 1, 2023, as a result of the passage of the Infrastructure Investment and Jobs Act (IIJA) in 2021.
Some of the cryptocurrency reporting provisions in the IIJA include:
- An expanded definition of brokers who must provide 1099-B. Cryptocurrency exchanges (Coinbase, eToro, Pioneer, Robinhood, etc.) are now considered brokers like traditional brokers.
- An expanded 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.
- Treating digital assets like securities, similar to stocks, bonds, and certain types of commodities in terms of capital gains/losses.
- Requiring the following information 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.
- Classifying as “cash” a digital asset with a value of $10,000 or more. 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”).
In June, Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Responsible Financial Innovation Act in an effort to ease some of these regulations. While passage of this bill is not likely to occur during the current Congressional session, many believe aspects of the bill will make their way into future legislation.
One of the more popular provisions in the Gillibrand-Lummis bill – as well as another bipartisan bill introduced in July by Sens. Kyrsten Sinema (D-AZ) and Pat Toomey (R-PA) – is the creation of a de minimis exemption so that people can make purchases with virtual currency without having to account for and report income. The Gillibrand-Lummis bill excludes from taxpayers’ income any gain or loss recognized on certain “personal” transactions up to $200.
This $200 threshold would not apply for transactions in which virtual currency is sold or exchanged for cash, other digital assets, or securities or commodities. Likewise, smaller purchases of the same transaction or series of related transactions would be aggregated together and not separated into smaller transactions to avoid reporting tax.
Another provision in the bill that is likely to eventually be approved is narrowing the definition of “brokers” who are subject to tax reporting requirements to apply to traditional brokers.
A third proposal in the bill would be to treat loans of qualified digital assets the same as securities lending transactions. Currently, securities loans (that meet certain conditions) are generally tax-free, but loans of digital assets are not. This bill would extend this rule so that digital asset transactions are treated the same as securities loans.
In the meantime, the IIJA is in effect. Therefore, 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.
Zachary Collins, CPA, is a Manager on our Client Services Team. He can be reached at firstname.lastname@example.org.