Investing in Cryptocurrency? What You Need to Know

Investing in Cryptocurrency: Important News

Many folks are investing in cryptocurrency these days; some are even using it as compensation to employees.  In terms of reporting that investment or compensation to the Internal Revenue Service (IRS), it has all been based on the honor system.  However, starting in 2023, any of your potentially taxable digital asset transactions must be reported to the IRS by an outside party.

For example, your employer provides a W-2 form, reporting your earnings. Similarly, a form 1099 from your broker is outside party reporting for your stock transactions.

Until now, there have been no comparable third-party reporting requirements in place for cryptocurrency trades and transfers — or for any other digital assets, such as non-fungible tokens, which are unique and non-interchangeable units of data stored on a digital ledger.

The recently passed infrastructure law now includes provisions requiring crypto industry brokers to issue 1099-B forms to their customers, which would be issued in early 2024 to reflect 2023 transactions.

And, in an effort to make it harder to engage in money laundering, the new law also requires businesses to report whenever it receives more than $10,000 of cryptocurrency in a single transaction (or in two or more related transactions), just as it must when it receives cash above that threshold.  Failing to report can be prosecuted as a federal felony.

The new reporting requirements will affect investors trading digital assets in a few ways.

You can no longer stay anonymous

The new reporting requirements represent a potential upside for crypto investors in a few ways:  This could be a sign that cryptocurrency is here to stay and getting a 1099 may prove helpful in tracking and reporting. The downside? Anonymity is no longer an option for those who want to keep transactions private, as platforms brokering crypto will now require a lot of personal information that gets cross-checked to confirm identity such as a legal name, address, phone number, a social security number or other taxpayer identification number, among other things.

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

Defining reportable events

However, not every crypto transaction will require third-party reporting because not every crypto transaction is a taxable event.  Just buying crypto is not taxable or reportable under the new law.  The purchaser would have to sell or exchange it in order for it to become a reportable event.

But since a reporting entity may not have all the information related to a transaction, it may be challenging to always have the tax basis for each trade or transfer.  For example, a person might transfer bitcoin from one non-custodial digital wallet to an established crypto exchange, and then later sell it from that account.  The cost basis on the sale may be reported as zero or as the price it was the day you originally transferred the currency, not the price it was the day it was actually purchased.

Who exactly must report?

Crypto industry followers have suggested that the law is written so broadly that players, such as miners and software providers, could be defined as “brokers” even though they may not have anything to do with the brokering of a taxable transaction, leading to wrongly classified players and major reporting obligations.

However, greater clarity is expected when the Treasury Department issues regulations in the coming months on how to interpret and implement the law’s reporting requirements.  Senior treasury officials have also said the department has been in discussions with industry players to better define which types of entities should be defined as brokers, trades and businesses for reporting purposes.

Have questions or need clarification? Do not go it alone; let us help you navigate through these new changes so you can be prepared and in the know.  Call our office today to schedule an appointment.