Cryptocurrency: The Tax Man Cometh! Are you ready?

Despite those who like to think otherwise, cryptocurrency and virtual currency are subject to taxation. You can find some of the basics regarding that taxation here. And if you haven’t taken the step to invest in cryptocurrency, but are considering it, you may want to read “Is It Smart to Invest in Cryptocurrency”. 

What is Operation Hidden Treasure?

Since 2018 the IRS has had an ongoing campaign to root out individuals who are not reporting virtual currency income. Operation Hidden Treasure has a dedicated team of Criminal Investigation professionals trained on virtual currency and they are seeking out virtual currency   tax evaders. As each year passes their efforts grow in seeking out those who under-report their income by neglecting to include virtual currency income. Willfully and intentionally not reporting income can be considered tax evasion which is a Federal crime. Even if a taxpayer who the IRS determines is doing this doesn’t get charged criminally, they can have a 75% tax penalty imposed (plus interest). The IRS has been forcing virtual currency exchanges like CoinBase to share client information to determine who are and who may be under-reporting income. But wait, there is more, because the IRS,  the U.S. Treasury, and Congress all want to make the process of collecting taxes on virtual currency easier.   

Congress and the President have decided to improve the tracking and reporting of cryptocurrency transactions as part of the infrastructure bill that was signed into law on November 15, 2021. 

  • “Brokers” of transactions involving digital assets are required to report to the IRS on Form 1099B or similar forms. 
  • Brokers will have to report identifying information of customers, cost basis, and gains or losses.
  • The definition of digital assets not only includes cryptocurrencies, but also non-fungible tokens (NFTs). 
  • This reporting requirement commences January 1, 2023. 

The gap from now until January 1, 2023 is a good thing, because it:

  • gives the IRS and US Treasury time to interpret and implement the legislation
  • allows time (possibly) for future legislation by Congress to make implementation better 

There are concerns that Congress doesn’t understand digital assets well enough to write good legislation regarding digital assets. The concerns primarily relate to the broad definition of broker. Some believe that it includes individuals and companies that it shouldn’t. For example, bitcoin miners, wallet developers, and others, who would find the new requirement burdensome, if not impossible. We’ll have to watch how this plays out. 

Another important requirement is that cryptocurrency, or rather all digital assets, will have the same reporting requirement as receiving $10,000 in cash. 

A Form 8300 will have to be filed when any person (individual, company, etc..) receives in the course of a trade or business digital assets with a value exceeding the legal threshold of $10,000. Note that while a lump sum $10,000 is the target of this reporting, reporting can be required due to a series of related payments that aggregate (add up to) above $10,000. Also, note that it is a felony to intentionally make payments or deposits in smaller amounts to avoid the $10,000 reporting requirement. This reporting requirement could require each party in an all digital asset transaction to report each other. Again, the requirement seems rather broad when considering how digital assets are handled, so we’ll have to watch how this plays out with US Treasury and IRS regulations and with possible legislative adjustments.

The US Treasury is expecting to increase revenue by $28 million with these changes. I suspect it will be even higher, which means having a good tax professional on your side is even more important. Even before the new laws go into effect you have the legal requirement to report virtual currency income properly. I can help make sure you report the income properly while minimizing your tax liability. Some virtual currency income is treated like asset transactions. Other virtual currency income is treated as ordinary income. Getting these right are important for ensuring your taxes are calculated correctly. 

If you would like to discuss your tax situation you can schedule an appointment with me here

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