IRS crypto tax reporting rules: All you need to know?

Highlights

• Brokers or crypto exchanges are required to file Form 1099-B as per the recently adopted infrastructure law.
• The law stipulates that the recipient of US$10,000 in crypto payment must collect, verify, and report the sender information within 15 days or face criminal liability or fine.
• According to IRS, the new rules would make the crypto marketplace more transparent, mitigate tax evasion issues and help collect revenue worth around US$28 billion.

Cryptocurrency income didn’t require disclosure before because there was no mandatory tax reporting rule. But now, it is going to change.

The recently adopted infrastructure law that contains guidelines for the crypto industry requires brokers or exchanges to file Form 1099-B from the tax year 2023 onwards. 

The law under section 6045 defines a broker as: “Any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

It further states that a recipient of US$10,000 in crypto payment must collect, verify, and report the sender information to officials within 15 days or face criminal liability or fine. In addition, brokers must report annual gains or losses from crypto assets from 2023 onwards. 

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According to regulators, it will increase the third-party information reporting by brokers, such as cryptocurrency exchanges, about customers. For example, brokers will file form 1099-B to report their customers' annual gains or losses for tax purposes. It has three copies: Copy A, Copy B, and Copy 1. The brokers or the exchange will file Copy A with the IRS and Copy 1 with the state. Copy B is sent to the customer for information before filing the tax. 

However, some experts said that form 1099-B in its present shape might not be helpful for the industry. For instance, the first concern is the absence of the required know-your-customer data for collecting and forwarding the sender information. 

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Source: Pixabay

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Concerns for brokers/exchanges

The main concern is the lack of information on actual asset cost in transfers between wallets before selling. Analysts say the incorrectly calculated capital gain or loss would cause the customer to pay more tax. Thus, the missing information about digital asset costs could lead to losses. 

Also, suppose the customers reconcile and report the capital gain or loss after confirming the cost they paid the first time. In that case, there may be instances when the figures may be different from the report filed by brokers or exchanges to the IRS and the state. But, again, the result would be tax notices and more hassles for stakeholders.

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What investor should do

Investors must tick the crypto checkbox on the tax return and report the crypto income or losses. Ideally, the reported amount should match the brokers' report sent to the IRS and the state. However, investors may not know what amount to report. The difference between the asset's original purchase price and the selling or exchange value is difficult to calculate. The costing and reporting data are not yet readily available on the exchanges.

Hence, for investors, the only remedy in the short term is to conduct all transactions from a single crypto exchange. In that case, the information about the purchase cost of the digital assets will be the same and Form 1099-B will be helpful. 

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For the regulator

The reason for using form 1099-B is to cover the crypto transactions under the purview of the existing tax system. The IRS said it would introduce more reporting features to help mop up around US$28 billion in revenue. However, most crypto income is not yet fully monitored or taxed, and changes in the reporting structure or form 1099-B are still needed.

There is, however, still time until Dec 31, 2023, when it will be effective, to modify the form. Form 1099-B is also applicable in the stock trade. But the process is more robust and transparent in the case of stocks. The IRS's involvement is expected to make reporting in the crypto market more transparent.

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IRS crypto tax reporting rules: All you need to know?

Bottomline

Crypto or digital asset prices are prone to fluctuations in the market. Hence, investors must evaluate them carefully before investing in the crypto market.