Cryptocurrency Tax ReportingPosted on August 18th, 2021
Posted by Muhammad Akram, CPA
The Senate recently passed the Infrastructure Investment and Jobs Act contains significant provisions that expand the scope of cryptocurrency tax reporting.
Broker Definition Amended / Expanded
IRC Section 6045 would be amended to define a broker as including “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
Industry participants and a number of Senators had voiced their concern that this provision was overbroad and could bring into scope certain non-custodial actors within the crypto ecosystem such as blockchain validators, sellers of hardware and software wallets and software protocol developers.
Digital assets are “covered securities” if acquired on or after January 1, 2023. Covered securities under Section 6045 are subject to cost basis reporting by the broker. This will leave relatively little time for institutions to implement cost basis functionality into their core systems.
Transfer Reporting for Crypto Assets
Section 6045A which currently governs the production of transfer statements when accounts are transferred between brokers would also cover transfers of digital assets.
Section 6045A (d) would require a broker to report transfers of digital assets to an account or address not maintained by a broker e.g. private wallets.
Digital Assets Defined
Any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary are digital assets.
This definition includes common cryptocurrencies but could have broader application to other (and newly developed) digital assets such as nonfungible tokens or NFTs.
Receipt of Digital Assets
Digital assets would also be treated as “cash” for purposes of the statutory requirement to report receipts of cash in excess of $10,000.
The provision applies to any person engaged in a trade or business and who, in the course of such trade or business, receives more than $10,000 in cash in one transaction or two or more related transactions.
Tax Reporting by Crypto Exchanges
The Senate Infrastructure bill next goes to the House, which is due to reconvene in September. Akram expect that there will be continuing lobbying by industry participants to limit the scope of the “broker” definition.
Crypto tax reporting for exchanges and institutions that fall within the definition of “broker” would utilize a Form 1099-B or a new form with a similar format, rather than a Form 1099-K (currently applicable).
Institutions that would likely fall within the broker definition (e.g., centralized exchanges), it may be an opportune time to begin assessing existing systems and procedures for cost basis and broader broker tax reporting readiness.