Invest in crypto? What you need to know about the new information reporting requirements

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If you’ve ever had a job or invested in stocks, you know the money you make goes to the federal government. This is because you and the IRS get a W-2 form from your employer that reports your annual income and a 1099 form from your broker that reports your stock transactions.

Until now, however, there have been no comparable third-party reporting requirements in place for cryptocurrency transactions and transfers – or for any other digital asset, such as NFTs.

But the recently passed infrastructure law includes provisions requiring players in the crypto industry who trade digital asset transactions to issue 1099-Bs for their clients’ accounts, which you will receive for the first time at. early 2024 to reflect your 2023 transactions. And in an effort to make money laundering more difficult, the new law also requires a business to report to the IRS whenever it receives more than $ 10,000 in crypto -currency in a single transaction (or in two or more related transactions), just as it should when receiving cash above this threshold. Failure to do so willfully can be prosecuted as a federal crime.

These new reporting requirements will affect investors trading digital assets in several ways.

You cannot remain anonymous

The new reporting requirements represent a potential benefit for crypto investors in two ways: They are a sign that crypto is here to stay. And given the headache of trying to keep track of all your trades, getting a 1099 can come in handy.

But the downside will be a loss of anonymity for those who want to keep their transactions private on the principal, or who have not fulfilled their tax obligations.

When you open a bank or brokerage account, you have to provide a lot of personal information that is cross-checked to confirm that you are who you say you are. You must provide your legal name, address, phone number, and a Social Security number or other tax identification number, among others.

But when you set up crypto-related accounts, the information you are asked for varies by platform.

“Until this year, it was quite common to open [an account or digital wallet] with a name and email address, ”said Erin Fennimore, head of information reporting at TaxBit, a cryptocurrency tax software provider.

Come 2023, that will change in many cases. “You are going to be asked for personal information that probably has not been requested from you in the past,” Fennimore said.

And the platforms required to report your transactions will need to verify that you are who you say you are.

Additionally, when a digital asset is transferred from one broker to another, the transferring broker will need to issue a statement to the receiving broker including information on the basis and holding period of the transferred asset so that the receiving broker can meet its 1099 reporting requirements.

What are the events to report

Not all crypto transactions will require third party reporting, as not all crypto transactions are a taxable event.

“The simple purchase of crypto is not taxable or reportable under the law. You have to do something with it, like sell or trade it,” Fennimore said.

But since a reporting entity may not have all the information relating to a transaction, “it’s going to be a practical challenge to always have the tax base for every transaction or transfer,” said Christopher Murrer, Partner at FinTech Group. by Baker McKenzie. Zurich.

For example, you can transfer bitcoin from one of your non-custodial digital wallets to an established crypto exchange and then sell it later from that account. The base price of the sale may be shown as zero or the price you originally transferred the currency to, not the price you actually bought it at.

You will therefore need to explain to the IRS why the information on your 1099 is wrong. “Ultimately, it is the taxpayer’s responsibility to report the exact tax base on their personal income tax returns,” Murrer said.

Who exactly should report

Some players in the crypto industry have suggested that the law is worded so broadly that various players, such as miners and software vendors, could be defined as “brokers” even though they do not have to. nothing to do with the brokerage of a taxable transaction.

If so, those who might be misclassified could face “massive reporting obligations,” as Coinbase CEO Brian Armstrong said on Twitter.

There is a similar lack of clarity on what will be considered a business for the purposes of reporting large single transactions. “This is a new industry, so it is difficult to know what regulators will consider a business,” Murrer said, noting that it is not clear, for example, how decentralized finance activities (DeFi), staking pools and NFTs could be classified.

But greater clarity is expected when the Treasury Department issues regulations on how to interpret and implement the law’s reporting requirements.

A senior Treasury official said the department has had discussions with industry players to better define what types of entities should be defined as brokers, trades and firms for reporting purposes, noting that it is highly unlikely that minors will ever be considered brokers.

Developing these regulations is a top priority for the department and they will be released in the coming months, the official said.

When they are, there will be a public notice and a comment period before the rules are finalized.

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