A look at digital asset info reporting in the infrastructure law
Friday, November 19, 2021
President Joe Biden signed the Infrastructure Investment and Jobs Act of 2021 (IIJA) into law on Monday, Nov. 15. The new law, like prior transportation bills, does include plenty of traditional roads and bridges provisions.
But it went decidedly digital to help cover some of its $1.2 trillion costs. The IIJA includes reporting requirements that mandate cryptocurrency exchanges share information with the Internal Revenue Service.
The good news for crypto fans who are freaking out is that they have time to adjust. These reporting rules generally don't go into effect until 2023.
Here are a few more things to know, primarily courtesy Checkpoint Thomson Reuters, about the new information sharing of transactions involving Bitcoin, Ethereum, Litecoin, and their myriad digital currency cousins.
Digital assets delineated: The new reporting requirements define a digital asset as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.
While you absorb that, remember that it's not necessarily the final word. The new law says the Internal Revenue Service can modify this definition.
For now, though, this definition will encompass most cryptocurrencies, as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.
Existing reporting covers digital assets: The ground rules on digital asset transaction reporting were laid much earlier. Nonwage income, such as that from investments, has been reported on 1099 forms for ages. The info sharing was expanded in 2011, when brokers began reporting via 1099-B the adjusted cost basis for some securities.
End-of-year 1099-B forms, which go to the asset owners and the IRS, also include details of transactions such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses. Furthermore, if you transfer stock from one broker to another broker, then the old broker is required to furnish a statement with relevant information, such as tax basis, to the new broker.
Transactions of digital assets, which is how the IRS categories cryptocurrency, will be added to the 1099-B list starting in 2023.
Digital asset broker definition: Under the IIJA, brokers who must furnish Form 1099-Bs will include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person. These so-called crypto exchanges essentially are any platform on which you can buy and sell the digital assets.
Transfers also reportable: In the digital world, transfers rather than sales or exchanges are common. This is the case if, for example, you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another such facility. This, for those of us (like me) who aren't into crypto, basically is analogous to moving money from an old-school bank savings account to a checking account.
The transfer, either crypto or old-school currency, is not a sale or exchange. But for these types of digital transfers, as with stock, the old Crypto Exchange will be required to furnish relevant digital asset information to the new Crypto Exchange.
Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. It is anticipated that such return will include generally the same information that is furnished in a broker-to-broker transfer.
Cash transaction guidelines: The IRS relies on the reporting of cash transactions that exceed $10,000 to help it combat, among other things, money laundering. These reports, made by filing on IRS Form 8300, include the identity of the person from whom the cash was received. The IIJA will require businesses to treat digital assets like cash for purposes of this existing 10K reporting requirement.
Crypto reporting start date: I've mentioned the starting date of the new digital asset reporting rules a couple of times already in this post, but since I've heard from many readers who are freaking out about timing, it bears clarifying and repeating.
The crypto reporting will apply to information reporting of tax year 2023 transactions. This means that digital asset date on Form 1099-B will be about applicable transactions occurring after Jan. 1, 2023.
Since that's still more than a year away, it's not yet clear whether the IRS will tweak its existing 1099-B to specifically note digital asset transactions. The agency also could create a totally new form. The same document uncertainty also applies to Form 8300 reporting of $10,000+ crypto transactions.
A few more crypto reporting matters: While the new digital asset reporting is down the road, Checkpoint Thomson Reuters has some more near-term advice for crypto owners.
If you use a Crypto Exchange, and it has not already collected from you a Form W-9 to confirm your taxpayer identification number, expect it to do so.
The transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies.
Finally, as with all tax reporting, be it from taxpayers or tax professionals or financial institutions, the possibility of information mistakes is a given. This is especially true when it comes to an entirely new type of reporting.
So buckle up. The first information reporting cycle for digital assets may be a bit bumpy. But at least we have some time to prepare.
You also might find these items of interest:
- Tax provisions are part of finally finished infrastructure bill
- What cryptocurrency's booming values mean to owners' taxes
- IRS clarifies when a cryptocurrency transaction isn't a tax transaction
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