The crypto industry has faced many challenges over the past few months. In June, bitcoin price fell to its lowest price in almost two years, shaking confidence and causing layoffs at platforms and affiliates.
Despite the setbacks, crypto is still huge According to CoinMarket, the global crypto market cap is $1.1 trillion or more, depending on the day. This is expected to more than triple the total amount of US corporate taxes in 2022.
Compared to these numbers, the IRS survey of Crypto was unremarkable. In 2017, in San Francisco, as part of an effort to obtain taxpayer information from Coinbase, U.S. Judge Jacqueline Scott Corley cited claims by the IRS that “only 800 to 900 taxpayers made Bitcoin-related gains in each of the relevant years.” and more than 14,000 Coinbase users bought, sold, sent, or received at least $20,000 worth of bitcoin in any given year.” Judge Corley wrote, “[t]The IRS has a legitimate interest in investigating these taxpayers.”
1040. change as
The Coinbase case was just one shot in a series of attempts by the IRS to gather information about crypto users. For the 2019 tax year, the agency announced a cryptocurrency compliance action for taxpayers with a new question on Form 1040 at the top of Schedule 1: Have you received, sold, sent, exchanged, or otherwise received any financial interest in virtual currency at any time during 2019?
In 2020, the IRS moved the yes-or-no question to the first page of Form 1040 where it currently resides — with one change. It now reads: Have you acquired, sold, exchanged, or otherwise disposed of a financial interest in virtual currency at any time during 2021? This means that all taxpayers, even those who don’t account for income or other investments in Schedule 1, must answer a question about using cryptocurrency.
new reporting requirements
Further changes are planned. While some platforms are already providing profit and loss information to taxpayers, the Infrastructure Act 2021 aims to unify reporting for tax purposes. The intention was to ensure that the IRS received the information and that crypto investors received the same tax documents that stock traders receive. According to a 2021 letter from a group of senators, the increased reporting will make it easier for taxpayers “to file their taxes more easily and encourage greater compliance.”
While the IRS has yet to release a draft of the proposed form, we do have some details. IRS CI Assistant Chief James Robnett confirmed at the New York University School of Professional Studies’ annual Tax Controversy Forum this summer that the IRS is working on the form, dubbed Form 1099-DA (Digital Asset). The form is used to report taxpayer cryptocurrency activity and includes the type of information you would normally see on a 1099-B form, such as: B. Number and type of asset, cost basis, fair market value and holding period. .
According to the law, the new reporting requirement begins in tax year 2023, which means Form 1099-DA should arrive in the hands of taxpayers in 2024 — assuming the IRS stays on time. However, murmurs about possible delays in implementation are growing louder.
definition of broker
Obviously there are still issues that need to be worked on. In particular, there are concerns that the definition of ‘broker’ in the law is too broad. Calls for clarification, which would require additional legislation, have grown louder after hopes of a solution by the end of 2021 were dashed.
Earlier this year, the Treasury released its green paper of proposals for the current government, which it notes is “not intended to draw any conclusions in relation to the current law”. Some of the suggestions focus on crypto – including the fact that more crypto guides are to come.
This week, Coinbase released its response to the Treasury Department’s request for comment on a recent executive order ensuring responsible development of digital assets. Among other things, Coinbase suggested that “given the use cases of cryptocurrency as a means of payment,” a consistent de minimis The reporting rules would reduce the compliance burden for taxpayers and the processing burden for the IRS. latin sentence de minimis roughly translated as “of minor importance” – in the tax world this term is used to indicate when the IRS deems an item “too small to render accounting for it unreasonable or impractical”. there.” Such rules apply to certain Form 1099 reports, such as For example, the $600 limit for Form 1099-MISC.
In 2018, the IRS was given a similar recommendation by the AICPA, which suggested there should be an exemption for personal transactions such as foreign exchange. This would be a serious concern that tracking the base and value of a cryptocurrency for purchase can be time consuming and cumbersome, in some cases with little taxable gain or loss.
Coinbase specifically pointed to decentralized finance, or DeFi, in its response, and also suggested that the reporting option on the Form 1099 should be considered so taxpayers may not have or be unable to obtain complete information. can not
So what should taxpayers do while these reporting requirements are sorted out and – hopefully – resolved? My advice remains the same: don’t just maintain a great record in 2022, but beyond. Even if brokers – whatever that means – issue reporting forms, the information may not be what you need. For example, taxpayers may find that their cost basis is not properly tracked and reported when using more than one platform or wallet.
And, of course, keep an eye out for rule clarifications and changes. You are important. In addition to regular Bloomberg Tax Crypto updates, you can read the IRS FAQs on virtual currency.
This is a regular column from Kelly Phillips Erb, TaxGirl. Erb comments on news from tax law, tax law and tax policy. Check out Erb’s weekly Bloomberg Tax column and follow him on Twitter @steuergirl.