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May 15, 2023

Important Tax News for Investors and Users of Cryptocurrency

If you use or invest in cryptocurrency, you may have seen something new on your tax return this year. And you may soon discover a new form reporting requirements for digital assets. 

Make sure you check the box

Starting from tax year 2022, taxpayers are required to check a box on their tax returns that indicates whether or not they received digital assets as a reward, award, or payment for services or property, or whether they disposed of any digital assets that were held as capital assets through exchanges, sales, or transfers. 

If you check the “yes” box, then you’re required to report all income related to any digital asset transactions.

A new information form for crypto users

According to the information recording rules, all brokers must report transactions in securities to both investors and the IRS. These transactions are reported on form 1099-B. Legislation enacted in 2021 extended these rules to crypto exchanges, custodians and platforms, as well as digital assets like cryptocurrency. 

These new requirements were set to be effective for returns required to be filed, and statements required to be furnished for transactions after 2022, but the IRS has since postponed the effective date until it issues a set of final regulations that provides instructions. 

In addition to extending this reporting requirement to cryptocurrency, the legislation also extends cash reporting rules for payments of $10,000 or more to cryptocurrency. This means that any business that accepts crypto payments of $10,000 or more is required to report those payments to the IRS on Form 8300. The rules apply to any transaction taking place in 2023 and beyond. 

Current rules and new reporting for digital assets

Currently, if you have a stock account, whenever you sell securities, you are issued a Form 1099-B. This form requires your broker to report details of transactions like sale proceeds, relevant dates, and your tax basis for the sale and the gain or loss. 

The 2021 legislation expanded the definition of “brokers” who are required to provide Form 1099-B to include businesses that regularly provide services involving the transfer digital assets on behalf of another individual. Once the IRS finalizes these regulations, any platform where you buy and sell crypto will be required to report digital asset transactions to you and the IRS.

These platforms and exchanges will be required to gather information from their customers so that they can issue Form 1099-B. They will need customers’ names, addresses, and phone numbers; the gross proceeds from sales, capital gains, or losses; and information on whether they were short or long-term proceeds.

It’s important to note that it’s not yet known whether the platforms or exchanges will be required to file Form 1099-B or a new IRS form.

Cash transaction reporting

Under another set of rules that are separate from the broker reporting rules, when a business receives over $10,000 in cash, it is required to report the transaction to the IRS, including the identity of the person from whom the cash was received. This is reported on Form 8300, and for this reporting requirement, businesses will need to treat digital assets the same as cash.

Form 8300 requires reporting information like occupation, address, and a taxpayer identification number. Current rules that apply to cash are usually applied to in-person payment in actual cash. This could make it difficult for businesses to comply with reporting rules when collecting the information needed for crypto transactions.

What you should know

If you’re using a crypto platform or exchange that hasn’t already collected a Form W-9 from you, expect it to do so in the future. Aside from collecting information from customers, these businesses will be required to begin tracking holding periods and buy-and-sell prices of any digital assets in customer accounts.

Stay up to date with Smolin 

If you want to find out how these new tax rules will affect you or your business, contact the knowledgeable professionals at Smolin for more information.

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