- New tax reporting provisions on cryptocurrency, as well as criminal consequences for noncompliance, survived in the Infrastructure Investment and Jobs Act (H.R. 3684) set to become law.
- The legislation imposes potential felony charges for failures to report certain "receipt" of digital assets, as well as expands the definition of "broker" to target crypto exchanges.
On November 5, 2021, the House of Representatives approved the Infrastructure Investment and Jobs Act, with President Biden expected to sign the measure into law. The bill drew controversy by introducing new cryptocurrency information reporting requirements and penalties, including an extension of the 1099 brokerage reporting regime retained in the final language. The Joint Committee on Taxation estimates these provisions are the largest revenue raiser in the infrastructure bill, with $28 billion projected over the next ten years.
As part of the infrastructure bill, Congress passed an amendment to Section 6050I of the Internal Revenue Code to treat receipt of digital assets as reportable under IRS Form 8300. While taxpayers already must report their cryptocurrency gains to the IRS, the new law mandates that a recipient collect, verify, and report a sender's personally identifiable information in certain transactions within 15 days or else face fines and criminal liability. Critics have decried the practical impossibility of Section 6050I compliance in an anonymous peer-to-peer system.
Crypto as Reportable "Cash" under Section 6050I
Section 6050I was originally designed to allow greater government surveillance of large cash transactions to curb illicit activities. The IRS states that the information reported under the Form 8300 "helps law enforcement combat money laundering, tax evasion, drug dealing, terrorist financing and other criminal activities." Given its purpose, the statute triggers harsher penalties than other reporting violations under the Code, including felony charges punishable by up to five years of imprisonment.
Under the statute, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file a Form 8300 within 15 days, signed under penalty of perjury. To complete the form, the recipient verifies and records the payer's personally identifiable information, including full name, birth date, address, Social Security number, and occupation. A Form 8300 filer is obligated to give written notice to every party named on the form by January 31 of following year. Copies of the Form 8300 also must be kept on record for five years.
While Section 6050I was premised on in-person transfers of cash, the amendment in the infrastructure bill redefines "cash" subject to reporting to include "any digital representation of value" involving distributed ledger technology, such as blockchain. Compliance on payments from an otherwise unidentifiable virtual wallet presents complex challenges, as compared to the straightforward receipt of physical currency.
Crypto Transactions Triggering Form 8300
A crypto transaction may trigger a Form 8300 filing under the amended Section 6050I when any "person" (including an individual, company, corporation, partnership, association, trust or estate):
- in the course of a trade or business
- digital assets
- with a value exceeding the legal threshold of $10,000, and
- no exception applies.
Each of these conditions raises potential issues for practical applications of the law. For example:
- Receipt – A taxpayer is presumably in receipt of digital assets whenever they become held in an account or at an address in the taxpayer's control, for instance, through possession of private keys. The actual tax consequences of the receipt are irrelevant to the Form 8300 reporting obligation on the transaction. Receipt occurs regardless of how long the assets are retained and whether they are subject to a custodial arrangement.
- Trade or Business – Though used throughout the Code, there is no bright-line definition of a "trade or business." Regular gain-seeking activities involving digital assets may be considered falling under this term of art, based on the facts and circumstances. Maintenance of networks by mining or staking could qualify, as might trading or lending of any form of digital value.
- Digital Assets – The applicable definition of "digital assets" is broad enough to cover various forms of value that exist on distributed ledger technologies, including familiar cryptocurrency like bitcoin as well as non-fungible tokens (NFTs). Notably, any exchange of digital assets for other digital assets (e.g., a purchase of NFTs with cryptocurrency) would qualify as a receipt, requiring each party to report the other.
- $10,000 Threshold – Valuation determinations for digital assets on each date of receipt are highly consequential for triggering the threshold. Structuring transactions into smaller receipts to avoid reporting constitutes a felony. Any receipt of digital asset is potentially reportable, regardless of dollar value, as receipts must be aggregated if related in a series of connected transactions. A new Form 8300 is required each time a payment results in an excess of the $10,000 threshold.
- Exceptions – Certain reporting exceptions apply in conjunction with the regulation of financial institutions under the Bank Secrecy Act. These exceptions have the effect of strongly discouraging digital asset storage without an intermediary, in line with FinCEN's proposed rules aimed at unhosted wallets.
Once signed into law, the cryptocurrency provisions under the infrastructure bill will take effect for returns and statements required to be filed after December 31, 2023.
Please contact us for further guidance on tax planning and reporting issues for cryptocurrency.