Infrastructure Bill Imposes New Cryptocurrency Reporting Requirements
Section 80603 of H.R. 3684, or more widely known as the Infrastructure Investment and Jobs Act (Infrastructure Bill), was signed into law by President Biden on November 15, 2021, and increases reporting requirements related to cryptocurrency (crypto) and related digital assets. Before diving into the Infrastructure Bill crypto section, it’s important to first understand why these amendments to the Internal Revenue Code (IRC) were originally proposed.
Since Bitcoin’s invention in 2009, the IRS has been unsuccessful in cracking down on unreported income from virtual currency transactions.
- The first IRS guidance was released in 2014 via Notice 2014-21, which in summary states virtual currency should be taxed as property.
- In November 2017, the IRS was granted enforcement of a John Doe Summons issued to Coinbase. This John Doe Summons granted the IRS access to taxpayers’ information for those individuals with transactions totaling $20,000 or more in one year.
- On July 2, 2018, the IRS announced that virtual currency would be one of the five new large business and international compliance campaigns.
- In the summer of 2019, the IRS issued series 6173 and 6174 letters to taxpayers thought to have unreported income due from virtual currency transactions.
- In October 2019, Revenue Ruling 2019-24 was issued to clarify the reporting requirements for income as a result of hard forks and air drops.
- A new question was added to Schedule 1 of the 2019 Form 1040 asking taxpayers, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
- The same question in the bullet point above was moved to the center of page 1 of the 2020 Form 1040.
- In August 2020, the IRS issued another round of series 6173 and 6174 letters.
- In March 2021, the IRS announced Operation Hidden Treasure, which focuses on training employees to identify tax evasion.
Despite all of its efforts, the IRS has yet to come up with an answer for the crypto tax gap. IRS Commissioner Charles Rettig believes a large portion of the purported $1 trillion tax gap is associated with unreported crypto income, leaving him to call on Congress for help and more resources.
Circling back to the Infrastructure Bill, it’s estimated that $28 billion in revenue will be raised by increasing the reporting requirements associated with crypto transactions.
First, the Infrastructure Bill amends IRC §6045, requiring “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” (defined as a “broker”) to report digital asset transactions cost basis and sales proceeds on Form 1099-B in a similar fashion to other “specified securities.” The Infrastructure Bill 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 Secretary.” This means cryptocurrency will now be subject to the same reporting requirements as stocks and bonds. Failure to report crypto transactions could result in a $280 penalty per customer, with a maximum penalty of $3 million.
Second, the Infrastructure Bill also amends IRC §6050I. Section 6050I requires any person engaging in a trade or business that receives more than $10,000 in cash (in one transaction or two or more related transactions) to file a Form 8300. Form 8300 reports the payer’s name, address, and taxpayer identification number, among other items, to the IRS. Under the new provisions in the Infrastructure Bill, digital assets are now considered cash, and as such, crypto transactions in excess of $10,000 must be reported on Form 8300. For example, this means businesses that accept virtual currency as payment may now be required to report transactions above $10,000 to the IRS. Failure to file Form 8300 could result in civil consequences and felony charges.
These amendments are effective for transactions beginning January 1, 2023, with reporting requirements kicking in as of January 1, 2024.
There’s some concern in the crypto industry that the definition of “broker” in this bill is too broad, which may stifle innovation, especially if miners and developers are considered “regularly providing any service effectuating transfers of digital assets on behalf of another person.” While the bill was making its way through Congress, several Senators proposed amendments to the definition of “broker,” but the amendments were ultimately blocked and did not make it into the final bill. However, a future bill could be presented in Congress to further narrow the definition of “broker.” A narrower definition would likely mostly target crypto exchanges and wallet providers. There’s also concern that the Form 8300 reporting requirement also may stifle innovation. For example, the potentially criminal consequences for failure to report may encourage those in the crypto space to move their operations to other countries with more friendly reporting requirements.
To learn more about tax-related considerations of cryptocurrency and more about blockchain, listen to episodes 78 and 82 of the Simply Tax® podcast, or watch the November 16 edition of Simply Tax Talks.
To stay up to date with IRS guidance on virtual currency reporting, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.