The Challenges & Opportunities For Reporting Cryptocurrency Transactions

Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and the investor. These transactions must be reported on Form 1099-B. Legislation enacted in 2021 extends these broker information reporting rules to cryptocurrency exchanges, custodians, or platforms (e.g., Coinbase, Gemini, or Binance), and to digital assets such as cryptocurrency (e.g., Bitcoin, Ether, or Dogecoin).

Under current rules, if you have a stock brokerage account, then whenever you sell stock or other securities, you receive a Form 1099-B at the end of the year. On that form, your broker reports details of transactions, such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses.

With the 1099-B reporting to crypto exchanges for most digital assets coming in 2019, and the 2021 legislation requiring brokers to include transfers of non-fungible tokens (tradable items), the acquisition or sale of digital assets may be significantly easier to track. No longer will you have to manually record each purchase and sale or hope the exchange or broker sends you a 1099-B at tax time.

The cryptocurrency exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B at the end of each tax year. Specifically, cryptocurrency exchanges will have to get the customer's name, address, and phone number, the gross proceeds from the sale of digital assets, and capital gains or losses and whether these were short-term (held for one year or less) or long-term (held for more than one year). Though this may be simply bureaucratic red tape, it will certainly annoy some cryptocurrency enthusiasts.

For these reporting requirements, a "digital asset" is any digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology. The IRS is allowed to modify this definition.

In its final form, the bill defines cryptocurrency as: 'an electronic medium of exchange that is designed to work as a medium of exchange, and is primarily used and accepted by the general public.' This definition is important because it means that most cryptocurrencies will be treated like currency for tax purposes.

Businesses that accept cash for their goods and services in excess of $10,000 must report it to the IRS. The cash transaction reporting rules are separate from the broker reporting rules that apply if a business accepts cash or cash instruments (such as a money order) for their goods and services in excess of $10,000. For example, a business that sells expensive jewelry or luxury boats will typically report the purchase on Form 8300, while businesses that receive cash as payment for their regular products or services do not generally have a requirement to report the transaction on Form 8300 when they receive less than $10,000.

Businesses seeking to comply with the post-2022 reporting rules for more than $10,000 in cryptocurrency may find it difficult to obtain identifying information to report on Form 8300.

In general, the current law that defines reportable payments applies to transactions using cryptocurrency. It is more difficult for businesses seeking to comply with the post-2022 reporting rules for more than $10,000 in cryptocurrency to collect the information that must be reported on Form 8300.

Cryptocurrency exchanges and platforms are now required to collect taxpayer identification numbers from their users beginning this year. What you should know.
Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will now be required to collect information about the holding period and prices at which digital assets are sold and bought. This is according to a recently issued report as a result of a study by the U.S. Securities and Exchange Commission (SEC).

Be aware that the transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies.
Finally, keep in mind that bitcoin exchanges or platforms will most likely lack all of the information required to meet their reporting obligations under the new laws. This might make the first year of reporting for digital assets difficult for investors, exchanges, and platforms.

Please feel free to call upon us at 415 644 5933 with any questions or concerns you may have about these new reporting rules.