As cryptocurrencies such as Bitcoin rise in popularity, government regulators repeatedly try, and often fail, to control its use as a tax shelter. Agencies such as the IRS struggle with determining the best way to tax cryptocurrency holdings and transactions, and since the IRS’ first Notice giving guidance on how to tax cryptocurrency it continues to play catch up with blockchain technology’s accelerating spread into everyday life.
TAXING CRYPTOCURRENCY: BACKGROUND
IRS Notice 2014-21, issued in 2014, stated that virtual currencies should be taxed as property. In 2017, the IRS was granted access to taxpayers’ information for transactions totaling more than $20,000 from cryptocurrency brokers such as Coinbase. Throughout 2018 and 2019, the IRS dedicated more focus to tracking down unreported income, and for the first time, Form 1040 asked taxpayers “[a]t any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” In 2021, the IRS announced Operation Hidden Treasure, which was meant to train IRS staff to better identify tax evasion.
INFRASTRUCTURE ACT ADDRESSES CRYPTO TAX GAP
Despite the IRS’ repeated attempts to thwart cryptocurrency’s use in tax evasion, IRS Commissioner Charles Rettig continues to attribute the growing $1 trillion tax gap in part to the rise in cryptocurrency. With the IRS in desperate need of assistance in the fight against tax evasion, Congress has finally acted.
The Infrastructure Investment and Jobs Act of 2021 (the “Infrastructure Act”) signed into law by President Biden on Nov. 15, 2021, contains numerous provisions to repair, rebuild and improve American infrastructure. One of the many ways Congress elected to pay for the Infrastructure Act was to answer the age-old question of “should cryptocurrency be treated as securities or cash?” Congress’ answer—both.
NEW REPORTING REQUIREMENTS TREAT CRYPTO AS BOTH SECURITIES AND CASH
The Infrastructure Act amends various sections of the Tax Code to broadly define a cryptocurrency “broker” and to require such brokers to report the cost basis and sale proceeds of the transfer of digital assets. This change subjects cryptocurrency to the same reporting regulations placed on securities such as stocks and bonds.
In addition to being treated as securities, the Infrastructure Act imposes reporting requirements that treat cryptocurrency as cash. Taxpayers receiving $10,000 or more per year in cryptocurrency must now report those payments on Form 8300, just as they would with cash payments.
NEW CRYPTO REPORTING REQUIREMENTS IMPACT INDIVIDUALS AND BUSINESSES
In addition to individual taxpayers who may be invested in cryptocurrency and other digital assets, the impact of this new reporting regulation will be immediately felt by the growing number of businesses that accept cryptocurrency payments in lieu of more traditional paper or plastic.
CONCERNS OVER NEW CRYPTO REPORTING REQUIREMENTS
The new cryptocurrency reporting requirements created by the Infrastructure Act are estimated to generate $28 billion in tax revenue, but the new requirements have critics. Some consider the definition of “broker” to be so broad as to sweep up cryptocurrency “miners”—which include huge numbers of ordinary taxpayers not actively engaged in traditional “broker” activities. Further, some worry that that the changes will stifle innovation by causing U.S. based cryptocurrency brokers and digital wallet providers to relocate their operations to counties with more friendly tax schemes.
These changes will not take full effect until Jan. 1, 2024.