NEW INFORMATION REPORTING REQUIREMENTS FOR CRYPTOCURRENCY BEGINNING IN 2023

Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and the investor. These transactions must be reported on Form 1099-B. Legislation enacted in 2021 extends these broker information reporting rules to cryptocurrency exchanges, custodians, or platforms (e.g., Coinbase, Gemini, or Binance), and to digital assets such as cryptocurrency (e.g., Bitcoin, Ether, or Dogecoin).

In addition to extending the above information reporting requirement to cryptocurrency, the legislation also extends existing cash reporting rules (cash payments of $10,000 or more) to cryptocurrency, so that businesses that accept payments of $10,000 or more in cryptocurrency will have to report that to the IRS (on IRS Form 8300).

The new reporting rules apply to transactions that take place in 2023 and later years.

Existing broker reporting rules. Under current rules, if you have a stock brokerage account, then whenever you sell stock or other securities, you receive a Form 1099-B at the end of the year. On that form, your broker reports details of transactions, such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses.

Furthermore, under the “broker-to-broker” reporting rules, if securities are transferred from one broker to another broker, then the old broker must furnish a statement with relevant information, such as tax basis, to the new broker.

New reporting for digital assets (most cryptocurrencies, and potentially some non-fungible tokens (NFTs)). The 2021 legislation expanded 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 (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to you and to the IRS at the end of each year.

These exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B at the end of each tax year. Specifically, cryptocurrency exchanges will have to get the customer’s name, address, and phone number, the gross proceeds from the sale of digital assets, and capital gains or losses and whether these were short-term (held for one year or less) or long-term (held for more than one year).

Note that it’s not yet known whether exchanges/platforms will have to file Form 1099-B itself (modified to include digital assets) or some other, new IRS form.

Digital assets defined. For these reporting requirements, a "digital asset" is any digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology. The IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies, and could potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting on Form 8300 will apply to cryptocurrency. Under a set of rules separate from the broker reporting rules, when a business receives $10,000 or more in cash in a transaction, that business must report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. For this cash reporting requirement, businesses will have to treat digital assets like cash.

IRS’s Form 8300 requires the reporting of the identifying information of the individual from whom the cash was received-including address, occupation, and taxpayer identification number-as well as other information. The current-law rules that apply to cash usually apply to in-person payments in actual cash. It may be difficult for businesses seeking to comply with the post-2022 reporting rules for more than $10,000 in cryptocurrency to collect the information that must be reported on Form 8300.

What you should know. If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will need to begin tracking the holding period and the buy and sell prices of the digital assets in customers’ accounts.

Be aware that the transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies.

Finally, it’s good to keep in mind that the cryptocurrency exchanges or platforms will probably not have all the information they need to meet their reporting requirements under the new rules. This may make the first year of reporting for digital assets challenging for investors, as well as exchanges and platforms.

WASH SALE RULE AND CRYPTOCURRENCY

A wash sale occurs when you sell or trade securities at a loss and then buy them or substantially identical securities within 30 days before or after the sale. Under these rules if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. This rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it's even sold.

Although the loss cannot be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).

The wash sale rule currently only applies to assets classified as stocks or securities and other financial instruments that are traded on organized exchanges. Cryptocurrency is classified as property by the IRS and is currently not subject to the wash sale rule. This means crypto investors are subject to the same taxes on capital gains and losses that apply to other investors, but they escape the wash sale rule that applies solely to financial securities thereby enabling an investor in a virtual currency to sell their position to lock in a capital loss and immediately repurchase the currency without losing exposure to the cryptocurrency.

It is worth noting that because of the growing popularity of cryptocurrencies, this “wash sale loophole” has received the attention of Congress and the Treasury Department and continues to be scrutinized. Under proposed provisions of the Build Back Better Act, which was ultimately defeated in the U.S. Senate, digital assets like cryptocurrency would have been treated the same as stock and securities in applying the wash sale rule for federal income tax purposes. This legislation would have applied to taxable years beginning after December 31, 2021. Although other bills are expected in the future that would apply the wash sale rules to cryptocurrencies there are no current proposals to close this loophole in 2022. As a result, it is suggested that interested investors might be able to lock in capital losses and repurchase their holdings before year end 2023 without risk of encountering the wash sale rule. Beginning in 2024, though, this might be subject to change.

We will continue to monitor the evolving reporting requirements and tax treatment of cryptocurrencies. Please contact the author of this Client Tax Alert Jeffrey Rambach, at (DD) 312-929-4425; (O) 385-355-4826 jeffrey.rambach@freemanlovell.com or your Freeman Lovell attorney with any questions or concerns you may have about these new reporting rules and tax treatment of cryptocurrencies.

Disclaimer: This alert is provided for information purposes. It does not contain legal advice or create an attorney-client relationship and is not intended or written to be used and may not be used by any person for the purpose of avoiding penalties that may be imposed under federal or state tax laws. The information and explanations stated in this alert are based on initial consideration of the law after its enactment and may be subject to different interpretation of the law and its meaning and effect in the future.