The Biden administration has been seeking changes to tax-reporting requirements for cryptocurrency since its early days. This is part of a package of changes to tax-reporting requirements the Biden administration is seeking as a means of cracking down on supposed misreporting of business income and general tax non-compliance.
A New Reporting Regime
Generally, the Biden administration has proposed creating a “comprehensive financial account information reporting regime.” This regime would include annual reports from financial institutions which would include gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.
This proposed tax-reporting requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts, with the exception of accounts below a gross flow threshold of $600 or fair market value of $600. Additionally, payment settlement entities would collect Taxpayer Identification Numbers and file a revised Form 1099-K reporting not only gross receipts, but also gross purchases, physical cash, as well as payments to and from foreign accounts, and transfer inflows and outflows.
The Impact on Asset Exchanges and Custodians
Importantly, cryptocurrency asset exchanges and custodians would be subject to these proposed reporting requirements. There would also be reporting requirements which would apply in cases in which taxpayers buy crypto-assets from one broker and then transfer the assets to another broker. Moreover, businesses that receive crypto-assets in transactions with a fair market value of more than $10,000 would have to report such transactions. These proposed changes would take effect on January 1, 2023.
Provisions to Watch
These proposed changes have yet to become law, but a couple of them feature prominently in the new bipartisan infrastructure legislation before Congress. There are two key provisions that those in the crypto-industry should be aware of.
First, it appears that the proposed reporting requirements for crypto-transactions with a fair market value of more than $10,000 will become law. This requirement appears have bipartisan support and has not received much push back, even from those within the crypto-community.
Second, the more important—and more controversial—change would be a clarification of the definition of the term “broker” for the purposes of determining who is required to file a 1099 form. The newly proposed definition is “any person who [for consideration] is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” These “brokers” would be required to provide information such as names, addresses, and gross proceeds of transactions, much as equities brokers are required to do.
The Impact on Smaller Miners or Network Validators
While such a requirement may not seem onerous to a large, centralized brokerage operation such as Coinbase, there are numerous other decentralized exchanges that do not collect this type of information. Indeed, it has been the concept of decentralization which has been one of the impetuses for crypto-currency development in the first place. The proposed legislation is also not clear on whether business such as miners or network validators would be subject to the reporting requirements. While there have been repeated assurances from senators that such businesses are not the intended targets of reporting requirements, ultimately the rules implementing these requirements will be developed by the Department of the Treasury, a department that has an obvious interest in collecting as much useful information as possible for the purpose of collecting taxes.
To Sum it Up: Reporting is Coming
Legislation on these issues remains in flux, and no doubt further edits on these requirements is on the way. But the message from Washington is clear: reporting is coming and businesses operating in the crypto-space should be prepared for these tax-reporting requirements for cryptocurrency.
Dressel/Malikschmitt LLP is boutique law firm with experience in the crypto-space. If you are starting out in the crypto-business, or face litigation related to blockchain-based assets, please contact us at firstname.lastname@example.org or call at 848-202-9323. The above article is not intended to be used as legal advice and should not be considered or relied upon as such.