On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (the “Infrastructure Bill”), which significantly expands tax information reporting for certain cryptocurrency transactions. The Infrastructure Bill includes an information reporting requirement for cryptocurrency asset exchanges and custodians on an IRS Form 1099, and an information reporting requirement for certain persons who accept large payments in cryptocurrency in such person’s trade or business on an IRS Form 8300. The effective date of these changes will apply to any information return required to be filed after December 31, 2023.
Form 1099 Reporting
Currently, the tax code does not specifically require cryptocurrency exchanges to report taxpayer information to both the IRS and their customers. However, beginning with the 2023 tax year, they will be required to collect taxpayer identifying information from their customers, so that they can properly issue Forms 1099 at the end of each tax year. Specifically, the following type of information will be required to be reported:
(1) name, address, and phone number of each customer;
(2) the gross proceeds from any sale of digital assets; and
(3) capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).
The Infrastructure Bill redefines the term “broker” under IRC 6045 to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”. Under the Infrastructure Bill, cryptocurrency exchanges will be treated similar to traditional brokerage houses. The Infrastructure Bill doesn’t specifically identify the type of information return that must be filed, but it likely will be similar to IRS Form 1099-B (Proceeds from Broker).
The IRS imposes a penalty up to $250 per customer, up to a maximum $3 million penalty, for failure to timely file a correct Form 1099 with the IRS under IRC 6721 and a penalty up to $250 per customer, up to a maximum $3 million penalty, for failure to timely furnish a correct Form 1099 to the customer under IRC 6722. These penalties may be reduced if such failures are timely corrected.
If the failure to file and furnish a correct Form 1099 is determined to be intentional, then the IRS imposes a penalty with respect to each such failure equal to $500 or, if greater, 5% of the aggregate amount of the items required to be reported correctly under IRC 6721 and IRC 6722. There is no maximum penalty for these intentional failures.
In addition, if it is determined that a person willfully violated the required reporting on an IRS Form 1099, in addition to other penalties provided by law, such person shall be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.
Form 8300 Reporting
The tax code currently requires reporting on an IRS Form 8300 by any person who, in the course of such person’s trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions) by the 15th day after the date such cash was received. The Infrastructure Bill expands the definition of cash to include “digital assets” which is defined in the Infrastructure Bill as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”
The IRS Form 8300 requires reporting of:
(1) the identifying information of the individual from whom the cash was received, including such individuals name, address, occupation, and taxpayer identification number;
(2) the identifying information of the person on whose behalf the transaction was conducted; and
(3) a description of the transaction and method of payment.
Under current law this reporting is typically reserved for physical, in person, payments in cash. This expansion of the definition of cash to include cryptocurrency could result in requiring reporting for digital payments in cryptocurrency and the information required to be reported on the Form 8300 may be more difficult to collect.
The IRS imposes a penalty up to $250 per customer, up to a maximum $3 million penalty, for failure to timely file a correct Form 8300 with the IRS under IRC 6721. These penalties may be reduced if such failures are timely corrected.
If the failure to file a correct Form 8300 is determined to be intentional, then the IRS imposes a penalty with respect to each such failure equal to the greater of $25,000, or the amount of cash received in such transaction (or related transactions) to the extent the amount of such cash does not exceed $100,000. There is no maximum penalty for these intentional failures.
In addition, if it is determined that a person willfully violated the required reporting on an IRS Form 8300 for cryptocurrency payments in excess of $10,000, in addition to other penalties provided by law, such person shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
Next Action Steps:
Cryptocurrency asset exchanges and custodians need to begin preparing to comply with these information reporting requirements on the IRS Form 1099. This preparation includes beginning to collect information from their customers, such as social security numbers and addresses. In addition, these companies will need to develop an internal process to keep track of the holding period and the buy and sell prices of the digital assets in its customer’s accounts.
Companies that currently receive, or may in the future receive, large payments in cryptocurrency need to be aware of the upcoming requirement to file an IRS Form 8300 upon the receipt of more than $10,000 worth of cryptocurrency and should begin to educate its employees on this upcoming filing requirement.
If you have any questions or concerns regarding the implementation of this legislation, please contact one of the authors of this alert. We have significant experience in tax reporting by financial institutions, tax disputes and penalty resolution, and with respect to managing the implementation of new reporting requirements adopted by the IRS.