What you should know (and fear) about the new IRS crypto tax report
What you should know (and fear) about the new IRS crypto tax report. The new law redefines “cash” to include “any digital representation of value,” including cryptocurrencies, but does that work in an anonymous system?
The Infrastructure Investment and Jobs Act (HR 3684) puts cryptocurrencies in the crosshairs, in which Congress and the Internal Revenue Service (IRS) hope to collect huge sums of taxpayers’ money.
This reporting system is expected to raise a staggering $ 28 billion over the next decade. There is no other provision in the recently enacted massive federal law designed to generate even roughly the same taxes. If you think this doesn’t mean the IRS is coming to your crypto on a massive scale and Congress is doing its best to make this easier, think again.
The crypto community was outraged when this measure was first proposed and tried to take back the difficulty. These efforts resulted in some restriction, but the conditions were enacted anyway. Some still speak of a retry, but that could prove to be a strong sale with $ 28 billion on the threshold the Biden government may need. As enacted, Form 1099 and other reporting requirements will not take effect until December 31, 2023. Nevertheless, the reports according to Form 1099 were created in January for the previous year. That means 2023 will be a big tax year.
And with 2022 approaching and 2021 tax returns due shortly after, it’s a good time to get your tax affairs in order. The new questions are whether or not you are a broker and who. And how will these confusing reporting requirements apply? On potential civil and even criminal penalties, you can bet that most exchanges are skeptical about brokers subject to the new law. Surprisingly, the question of what exactly constitutes participation in a trade or business can also remain open.
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The IRS still says that more people are not reporting their crypto, but more reporting definitely means more compliance worth $ 28 billion. The definition of a broker according to § 6045 of the tax code currently includes:
“Any person (considered) regularly responsible for the provision of services involving the transfer of digital assets on behalf of another person.”
Digital asset is defined as “any digital representation of value recorded in a cryptographically secured distributed ledger or similar technology prescribed by the Minister”. [of the Treasury]”Digital assets are now a recognized security that must be reported on the IRS Form 1099-B. It is the same form that brokers use to report stock sales when selling Amazon or other stocks.
The new law gives the Treasury Department and the IRS the ability to draft rules for these new rules. There are broker-to-broker rules and other rules.
Crypto reports over $ 10,000
Brokers reporting on Form 1099-B pale in comparison to the new requirements for cash-like reporting forms with their appalling criminal liability. In 2014, the IRS announced it would treat cryptocurrencies as property, not money. The impact of this rule on your taxes is enormous. For this reason, every successive transfer or transaction of crypto currencies (also for other crypto currencies) causes more taxes. Ironically, however, Congress and the IRS are now taking a page off the cash register.
For decades, transactions in excess of $ 10,000 in cash have created a requirement for any business to file IRS Form 8300 within 15 days to report cash transactions to the IRS. Buy a vehicle for more than $ 10,000 in cash and the dealer must report it to you. If you go to a bank and withdraw $ 10,000 of your own cash, the bank must report you to the IRS. Pay the advisor more than $ 10,000 in cash and your advisor will need to report you to the IRS.
Related:More IRS crypto reports, more dangerous
If you make successive small withdrawals or payments to avoid cash reporting, you are “structuring” your transactions to circumvent the rules and are in and of themselves a violation. Federal crime. Many people have been caught by this rule, tried to cover up some embarrassing but legal payments, and have unwittingly committed a crime, convicted of a crime, fined and then sentenced to up to five years’ imprisonment. Whether you want to structure the rules or leave them out, you don’t want to mess around with these cashier reporting rules.
The bank, merchant or entrepreneur must provide the person’s name, date of birth, address, social security number and occupation. And now Congress and the IRS are also requesting this form for crypto. As amended, the new law redefines “cash” and includes “any digital representation of value” in connection with distributed ledger technology such as blockchain. Would that work in an anonymous system?
As of January 1, 2024, cryptocurrency trading may trigger the submission of a Form 8300 if an “individual” (including individuals, corporations, corporations, partners, associations, trusts or estates) in a transaction or business with a value over $ 10,000. Valuation is done on the day it is received and, as with anything crypto-related, pricing is fraught with issues. Again, it is a crime to structure transactions into smaller documents to avoid reporting. And since receipts need to be aggregated when they are involved in a series of related transactions, virtually every digital asset receipt is likely to be reported, regardless of dollar value.
Of course, the IRS’s interest in cryptocurrencies is nothing new. People had to report crypto profits to the IRS. In fact, every IRS Form 1040 or individual income tax return currently has a “Do you have crypto” question. It is often compared to the question, “Do you have an offshore bank account” which appears in Appendix B and which has resulted in numerous criminal convictions for the IRS and severe civil penalties.
The new requirements are far-reaching. And while there is an extension to December 31, 2023, many changes are needed to make it relevant and applicable. The new law requires recipients of cryptocurrencies worth more than $ 10,000 to collect, review, and report the personal information of the senders within 15 days. Failure to do so could face fines and even criminal liability.
To say you are an investor, not a trader, sounds tempting when rigorously emphasized. However, there is extensive tax law on the subject, with some clear standards, and a lot is at stake. Would any of these be easy in an anonymous peer-to-peer system? May not, but there will likely be fear of the new regulations and to some extent signing up will be for safety rather than excuse.
Robert W. Wood is a tax attorney serving clients worldwide from Wood LLP’s San Francisco office, where he is a managing partner. He is the author of numerous tax books and is a regular contributor to Forbes, Tax Notes and other publications.