The crypto industry has faced several challenges in recent months. In June, the price of bitcoin fell to its lowest level in nearly two years, shaking confidence and leading to layoffs at platforms and organizations that support them.
Despite the setback, crypto is still big-according to CoinMarket, the global crypto market cap is $1.1 trillion or more, depending on the day. That’s about three times more than the amount of U.S. corporate taxes expected to be collected in 2022.
Compared to these numbers, the IRS’s collection of crypto has been unusual. In 2017, as part of an effort to obtain taxpayer information from Coinbase, US Magistrate Judge Jacqueline Scott Corley in San Francisco stated the IRS claims that “only 800 to 900 taxpayers reported profits related to bitcoin in each relevant year and more than 14,000 Coinbase Users have bought, sold, sent or received at least $20,000 worth of bitcoins in a given year. Judge Corley wrote that “[t]The IRS has a legitimate interest in investigating these taxpayers.
Changes to Form 1040
The Coinbase case is just one shot in a series of IRS efforts to collect information on crypto users. For the 2019 tax yearThe agency announced cryptocurrency compliance measures for taxpayers with new questions on Form 1040 at the top of Schedule 1: At any time in 2019, did you receive, sell, send, exchange, or gain financial interest in any virtual currency?
In 2020, the IRS is moving the yes-or-no question to the front page of the current Form 1040 — with a tweak. It now reads: At any time in 2021, did you receive, sell, exchange, or dispose of any financial interest in any virtual currency? This means that all taxpayers, even those without adjustments for income or other investments in Schedule 1, must answer questions about the use of cryptocurrency.
New reporting requirements
Another change is in store. While some platforms already provide information on benefits and losses to taxpayers, the 2021 infrastructure law attempts to standardize reporting for tax purposes. The goal is to ensure that the IRS gets the info and crypto investors receive the same tax documents that stock traders receive. According to a 2021 letter from a group of senatorsincreased reporting will make it easier for taxpayers to “file taxes more easily and promote higher compliance.”
While the IRS has not yet released a draft of the proposed form, we do have some details. IRS CI Chief Deputy James Robnett confirmed this summer at the New York University School of Professional Studies’ Tax Controversy Forum that the IRS is working on such a form – called Form 1099-DA (Digital Assets). The form will be used to report cryptocurrency activity to taxpayers and will include the types of information you typically see on Form 1099-B, such as the number and type of assets, cost basis, fair market value, and holding period.
Under the law, the new reporting requirements begin in the 2023 tax year, meaning Form 1099-DA should be in the hands of taxpayers by 2024 — assuming the IRS stays on schedule. However, rumblings about potential delays in implementation grow louder.
Definition of Broker
There are clearly still issues to be addressed. In particular, there are concerns that the definition of “broker” in the law is too broad. Calls for clarification, including whether additional legislation is needed, have grown louder after hopes that it would be finalized by the end of 2021 fell through.
Earlier this year, the Ministry of Finance released The Green Book contains the current administration’s proposals, which, he notes, “are not intended to draw conclusions about current law.” The crypto-focused section of the proposal notes that more crypto guidance is coming.
This week, Coinbase went public the answer to the Treasury ask for comments in a new executive order, Ensuring Responsible Development of Digital Assets. Among other things, Coinbase suggested that “given the use case for cryptocurrency as a medium for payment,” a consistent de minimis reporting rules will reduce the compliance burden for taxpayers and the processing burden for the IRS. Latin words de minimis roughly translates to “insignificant” – in the tax world, the term is used to indicate when the IRS considers an item “so small as to make the accounting unreasonable or impractical.” These rules apply to certain Form 1099 reports, such as the $600 threshold for Form 1099-MISC.
In 2018, the AICPA made similar recommendations to the IRS, suggests that there is an exception like for foreign currency for personal transactions. That would express the real concern that tracking the basis and value of cryptocurrency for purchases can be time-consuming and burdensome whether, in some cases, the gains or losses are taxable.
Pointing specifically to decentralized finance, or DeFi, Coinbase also suggested in response that reporting alternatives to Form 1099 should be considered to address concerns that taxpayers do not have or can receive complete information.
So what should taxpayers do when these reporting requirements are sorted out and – hopefully – clarified? My advice remains the same: Keep good records, not only in 2022 but beyond. Even if the broker – whatever that means – issues a report form, the information may not be all that is required. For example, taxpayers may find that their cost base is not being tracked and reported correctly if they use multiple platforms or wallets.
This is a regular column from Kelly Phillips Erb, Taxgirl. Erb offers commentary on the latest news on taxes, tax law, and tax policy. Look for Erb’s weekly column from Bloomberg Tax and follow him on Twitter at @pajak.