If you've ever had a job or invested in stocks, you know that the money you earn is reported to the federal government. That's because you and the IRS get a W-2 a form from your employer that reports your annual earnings and a form 1099 from your broker that reports your stock transactions.
However, until now, there have been no comparable third-party reporting requirements for cryptocurrency transactions and transfers, or for any other digital asset, such as NFT.
These new reporting requirements will affect investors trading digital assets in various ways.
You cannot remain anonymous
The new reporting requirements represent a potential advantage for cryptocurrency investors in two ways: They are a sign that cryptocurrencies are here to stay. And given the headache of trying to keep track of all your transactions, getting a 1099 can prove useful.
But the downside will be the loss of anonymity for those who want to keep their principal transactions private or who have not met their tax obligations.
But when you set up crypto-related accounts, the information that you are asked for varies by platform.
"Until this year, it was quite common for you to be able to open [an account or digital wallet] with a name and email, "said Erin Fennimore, chief information officer at TaxBit, a cryptocurrency tax software provider.
In 2023, that will change in many cases. "You will be asked for personal information that has probably not been asked of you in the past," Fennimore said.
And the platforms required to report your transactions will need to verify that you are who you say you are.
In addition, when a digital asset is transferred from one broker to another, the transferring broker will have to issue a statement to the receiving broker that includes information on the basis and holding period of the transferred asset so that the receiving broker can satisfy its requirements. 1099 reporting requirements.
What are reportable events?
Not all crypto transactions will require third party reporting because not all crypto transactions are a taxable event.
"The simple purchase of cryptocurrency is not taxable or reportable under the law. You have to do something with it, like sell it or trade it," Fennimore said.
But since a reporting entity may not have all the information related to a transaction, "it will be a practical challenge to always have the tax base for each transaction or transfer," said Christopher Murrer, associate of Baker McKenzie's Fintech group. Zurich.
For example, you can transfer bitcoin from one of your non-custodial digital wallets to an established crypto exchange and then sell it from that account. The cost basis of the sale can be reported as zero or as the price that was on the day you originally transferred the coin, not the price that was on the day you actually purchased it.
Therefore, you will have to explain to the IRS why the information on your 1099 is incorrect. "Ultimately, it is up to the taxpayer to report the precise tax base on their personal tax returns," Murrer said.
Who should report exactly?
Some in the crypto industry have suggested that the law is worded so broadly that various players, such as miners and software vendors, could be defined as "intermediaries", although they may not have anything to do with the intermediation of a taxable transaction.
There is a similar lack of clarity about what will be considered a business for the purposes of reporting large individual transactions. "This is a new industry, so it is difficult to know what regulators will think a business is," Murrer said, noting that it is not clear, for example, how decentralized finance activities (DeFi) can be classified, participation groups and NFTs.
But greater clarity is expected when the Treasury Department issues regulations on how to interpret and implement the law's reporting requirements.
A senior Treasury official said the department has been in talks with industry players to better define what types of entities should be defined as brokers, exchanges, and businesses for reporting purposes, noting that it is highly unlikely that miners will ever consider themselves brokers.
The development of these regulations is one of the department's top priorities. and will be issued in the coming months, the official said.
When they are, there will be a public notice and comment period before the rules are finalized.
