Sirwin
Sirwin

A U.S. Tax Law Passed in 2021 is Making Crypto Tax Reporting Hell in 2024


Back in 2021, the Infrastructure Investment and Jobs Act was passed as a response to help the country recover from COVID, inflation, and economic stagnation. And, of course, tax changes were buried in that omnibus law package, intentionally written to kick in years after the immediate need when many would least expect it. That change has now arrived as of January 1, 2024, the effective date of the new law component. 

The Specifics

Specifically, the law aims to capture income earned from cryptocurrency income, whether goods or services, that exceeds $10,000. It's important to note this is not limited to a singular transaction that needs to total over $10,000 in value. It can include and aggregate of transactions that reach $10,000 for the same related payments and relationship. The one clear part in the change is that the value of the given crypto at the time is what makes the calculation. And, like many other tax reporting transactions, the transfer should include the Tax Identification Numbers of both the payor and the payee that the crypto is going to. 

The idea of a $10,000 income reporting is not new. For decades, cash bank deposits over $10,000 had to be reported to the IRS to track income that other wise might not get reported. It's been one of many tools used to find money-laundering as well. And anyone in business is very familiar with 1099 reporting, and the slew of 1099 forms the IRS requires to know how different payments are being made for services and non-employee income. 

However, for the crypto world, the new $10,000 reporting requirement is creating all sorts of consternation. It helps to clear up some of the fluff.

The IRS will expect that the related new reporting happens on Form 8300. Where it applies, businesses that receive payment above $10,000 in cryptocurrency assets will be expected to report. That includes direct coins, tokens, NFT values, barter, sales, trades and exchanges for the same value. Form 8300 doesn't apply to private individuals. Aggregated payments apply as well. So, repeat crypto payments for the same account that add up and reach $10,000 or more trigger the reporting. Again, that number number is calculated based on what the market valued the crypto at the day and time of the transfer. More important, identification by tax number of both payor and payee are required in the reporting too. 

So What if Reporting is Skipped?

First off, any required tax reporting being skipped is a bad idea. Federal tax law pretty much promotes such a violation intentionally done to tax evasion, tax misrepresentation or similar, which is a felony. And a federal felony is no laughing matter. 

The problem, however, shows up in more complicated situations. For example, what defines "intent" with regards to the reporting? Is it a pattern of not reporting, or is it a one-time mistake? A lot depends on enforcement, which hasn't happened yet in any form. That doesn't mean it won't, nor should the reporting be ignored in the meantime waiting for that clarity. Being the first to get in trouble with a tax agency is not how one keeps their crypto and grows it effectively.

The second problem is the timing of the reporting. Apparently, there is an urgency to the determination. Parties have a 15-day window to file their report. That kind of pressure is going to be a whopper of a headache for whales, who easily move $10,000 or more in crypto sometimes daily. It's also a repeat filing headache subject to audit risk, leaving lots of room for human error to be painful in a math mistake or similar. Anyone who deals with crypto regularly as a business is already working on setting up a track and report system for the same versus waiting for the IRS to provide the needed guidance specifically. 

Questions? Questions? We Have Lots of Questions!

The above said, there are still plenty with questions. Some of them are fairly obvious, when you think about it, but others are real headscratchers that likely won't be figured out until some implementation happens. The smart player errs on the side of reporting where there is ambiguity:

  • If a mining block reward applies who's tax ID should be included in reporting? I'm personally not sure why this one is confusing. It's basically the payor's ID as well as the payee's ID. Where this gets fuzzy is in pools, i.e. the mining block reward is split among multiple players. A good practice approach would be to keep track of the relevant split. Obviously $10,000 is going out, so that's reportable. Everyone getting a piece should be included in that. While it's not required for the recipients to report immediately (unless they aggregate in their own amounts to the value minimum), the payor is required and has to include the details on their filing. And yes, in practice, that then includes the data of the recipients automatically (interesting how that plays to the IRS' favor).  
  • What happens in a $10,000 transfer of assets? It looks like a payment right? In this regard, if a party is in control of both the send and the receipt, they shouldn't have to report. But there should be records on file to prove ownership of both the send and receive too if there is an audit. Remember, aside from a few private chains, the blockchain is public, and the IRS is scouring various chains for relevant transactions and identified wallets.
  • How is the $10,000 calculated? It should be the market value at the time of the transaction. This gets tricky though because crypto values can swing wildly as seen by Bitcoin just this week alone. Generally, there should be a value record kept at the time of the transaction. The payor probably has the initial burden, but the recipient has the same too just as fast. 
  • Does a decentralized exchange make a difference in reporting? Not for the recipient. If you receive a payment over the minimum, it should be reported per the new law. The decentralized exchange is responsible for itself. But being recipient is the responsibility that payee has to answer too with the IRS. You don't need the IRS to spell this out for you; the new law already did.
  • Who does the enforcement? Seriously, who cares? If you have to report, do it. There's no real benefit trying to play one federal agency off another. Whether its FinCEN or the IRS, eventually evasion is going to get punished. 
  • Does an NFT count? Based on the way the new law reads, yes, it qualifies as a crypto asset that can be valued towards the $10,000 minimum.

Clarity on the new crypto reporting will eventually develop over the next year or so, but for right now we just have to accept there's another level paperwork that now exists. It's been a long time in coming, and now 2024 has opened the stage curtains for the first act of the show. 

Additional Resources

IRS specific links on the above topic:

 

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WinterYeti
WinterYeti

A professional freelance writer for the last 20 years and a budding photographer by hobby.


The Intersect of Crypto Musings & Consumer Impacts
The Intersect of Crypto Musings & Consumer Impacts

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