The bipartisan Infrastructure Investment and Jobs Act (IIJA), which was signed into law on November 15, 2021, includes two provisions affecting the reporting of transactions involving digital assets, including cryptocurrency, for U.S. taxpayers. The first provision expands information reporting requirements (Form 1099-B filings) to include transfers of digital assets. The second provision adds digital assets to current rules that require businesses to report cash payments over $10,000. Both of these provisions apply to returns required to be filed after December 31, 2023.
Form 1099-B Reporting
Section 80603 of the IIJA amends Internal Revenue Code (IRC) Section 6045(c)(1) to include transfers of digital assets within the scope of transactions that must be reported on Form 1099-B beginning with returns required to be filed for 2023. The reporting requirement applies to brokers or any person responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. Currently, traditional cryptocurrency exchanges, miners and software developers (for example, creators of software and hardware wallets) are not required to issue Form 1099-B.
It is worth noting that, prior to passage of the IIJA, a U.S. Treasury Department official was reported to have unofficially stated that the Treasury Department would not target non-brokers, such as miners and certain software and hardware developers, if the reporting requirement was enacted. However, the wording of Section 80603 suggests that non-brokers will be required to provide Form 1099-B to customers and the Internal Revenue Service (IRS). Therefore, any person that regularly provides services effectuating transfers of digital assets should begin preparing to comply with the IIJA’s Form 1099-B reporting requirement.
Without the IIJA’s amendment to IRC §6045(c)(1), taxes on transactions involving digital assets may potentially be underreported to the IRS, as currently no official record of such transactions is required to be maintained and transmitted to the taxing authorities. However, the Form 1099-B reporting requirement as enacted presents challenges, as cryptocurrency is designed to be able to be sent across exchanges and wallets without the intervention of a centralized authority. As a result, exchanges, miners and software developers may not have access to all of the information required to be reported on Form 1099-B, such as name, social security number, address, acquisition date and cost basis. Consequently, a broker meeting the new definition within IRC §6045(c)(1) may be forced to file Form 1099-B with cost basis shown as zero, thus potentially causing the gain reported to the IRS to be overstated. It is imperative that taxpayers maintain detailed records of their cryptocurrency transactions to accurately report taxable gains or other income.
Form 8300 Reporting
IRC Section 6050I requires trades or businesses receiving more than $10,000 in cash in one transaction or in two or more related transactions to file Form 8300. Section 80603 of the IIJA amends Section 6050I(d) to expand Form 8300 reporting requirements to include digital asset transactions. Under the new rules, for example, if an individual purchases a single nonfungible token (NFT) directly from an artist for $15,000 in bitcoin, the seller will be required to file Form 8300 within 15 days to report the receipt of the cryptocurrency. To accurately complete Form 8300, the seller will be required to gather information such as, but not limited to, the purchaser’s name, taxpayer identification number, birth date and address.
For purposes of the $10,000 threshold, all transactions between the parties that occur within a 24-hour period will be considered related transactions. In addition, transactions between the parties that occur within a 12-month period will be considered related transactions to the extent they are part of a connected series of transactions (for example, the same sale broken into multiple transactions).
Failure to comply with the rules under Section 6050I(d) carries the risk of substantial penalties. Negligent failure to file Form 8300 may result in penalties of up to $280 for each occurrence, which may not exceed a maximum of $3,302,000 per calendar year. Intentional or willful failure to disclose a covered transaction under Section 6050I(d) may result in both civil and criminal penalties, as well as felony prosecution. Intentionally disregarding Form 8300 reporting may result in civil penalties equal to the cash value received in the transaction, which applies to each intentional failure to comply. Intentionally disregarding the reporting requirements also carries potential criminal penalties of $25,000 for individuals and $100,000 for corporations, and/or five years in prison.
There are also penalties for individuals and corporations who cause or attempt to cause a trade or business to fail to file a required report, cause a trade or business to file a required report containing a material omission or misstatement of fact, or attempt to structure transactions in a way to avoid the reporting requirements of Section 6050I(d). These violations may be subject to criminal penalties up to $100,000 for individuals and $500,000 for corporations and/or three years in prison.
At the time of this publication, legislation has been introduced to more narrowly define “broker” to exclude certain digital assets and defer reporting requirements for digital assets under IRC §6050I(d) to 2026. As this is a developing area of taxation, please reach out to a tax practitioner for continued information.