One of the appeals of using Bitcoin and other cryptocurrencies are that the transactions are both secure and private. This will not be the case after December 31, 2022. This is because the Infrastructure Investment and Jobs Act of 2021 (IIJA) of Nov. 15, 2021 includes reporting requirements requiring cryptocurrency exchanges to report cryptocurrency transactions on form 1099 starting in 2023.
Currently, whenever you sell stock or other securities, you receive a Form 1099-B at the end of the year from your broker. Your broker uses that form to report details of transactions such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses. If you transfer stock from one broker to another broker, then the old broker is required to furnish a statement with relevant information, such as tax basis, to the new broker.
The IIJA expands the definition of brokers who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (\Crypto Exchanges\). Any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.
Sometimes you may have a transfer transaction that is not a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another Crypto Exchange, the transaction is not a sale or exchange. For that type of transfer, as with stock, the old Crypto Exchange will be required to furnish relevant digital asset information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. It is anticipated that such returns will include generally the same information that is furnished in a broker-to-broker transfer.
For the reporting requirements, a \digital asset\ is any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. Furthermore, the IRS can modify this definition.
This definition of a digital asset captures most cryptocurrencies as well as potentially including some non-fungible tokens ( NFTs ) that are using blockchain technology to represent one-of-a-kind assets like digital artwork.
One area of ambiguity is how NFTs will be valued. Now, when a business receives $10,000 or more in cash in a transaction, that business is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA will require businesses to treat digital assets as cash for purposes of this reporting requirement. This means that the Crypto Exchanges handling NFTs will need to set some value on those Cryptocurrencies and NFTs that are transacted on the platform. Setting the value of a fungible asset, like bitcoin, will be simpler than setting the value of a non-fungible asset, like an NFT.
These digital asset reporting rules will apply to information reporting that is due after December 31, 2023. For Form 1099-B reporting, this means that applicable transactions occurring after January 1, 2023 will be reported. Whether the IRS will refine the Form 1099-B for digital asset nuances, or come up with an entirely new form, is yet to be seen. Form 8300 reporting of cash transactions will presumably follow the same effective dates.
In short, if you have, or are planning on acquiring, digital assets, here is what to expect before the end of 2022:
- If you use a Crypto Exchange, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.
- The transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies.
- A reporting intermediary does not always have perfect information, especially when it comes to an entirely new type of reporting. Thus, the first information reporting cycle for digital assets may be a bit bumpy.