Responding to the New IIJA Filing Rules (I): Analysis of Reporting Obligations and Potential Consequences of the New Regulations

The Infrastructure Investment and Jobs Act (IIJA), signed into law on November 15, 2021, includes two provisions that affect U.S. taxpayers reporting transactions involving digital assets, including cryptocurrencies. The first provision expands the information reporting requirements to include the transfer of digital assets. The second provision adds digital assets to the current rule, requiring businesses to report cash payments in excess of $10,000. Both of these provisions apply to returns that need to be filed after December 31, 2023. The law will come into force on January 1, 2024.

[if !supportLists]1. [endif]The main content of the new crypto tax law

[if !supportLists]1.1 [endif]Two Provisions

[if !supportLists]1.1.1 [endif]Form 1099-B

IIJA Section 80603 amends Internal Revenue Code (IRC) § 6045(c)(1) to provide that certain digital asset transfers must be reported on Form 1099-B. This scope of reporting applies to brokers or anyone responsible for providing any services that enable the transfer of digital assets on a regular basis on behalf of others. Previously, cryptocurrency exchanges, miners, and software developers (e.g., creators of software and hardware wallets) were not required to issue a Form 1099-B.

Notably, prior to the adoption of the IIJA, a U.S. Treasury official informally stated that the Treasury Department would not impose this reporting requirement on non-brokers, such as miners and certain software and hardware developers. However, the revised provisions of the IIJA indicate that even non-brokers who are included in the scope of "providing any services that enable the transfer of digital assets on behalf of others on a regular basis" will be required to provide a Form 1099-B to the client and the Internal Revenue Service (IRS). Therefore, anyone who regularly provides services to enable the transfer of digital assets should comply with the IIJA's Form 1099-B reporting requirements. In the final analysis, the main purpose of this form is to combat money laundering.

At the same time, the developed Form 1099-B reporting requirements also present challenges, as cryptocurrencies are designed to be able to be sent across exchanges and wallets without the intervention of a central 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, date of acquisition, and cost basis. As a result, brokers who meet the new definition of IRC6045(c)(1) may be forced to file Form 1099-B with a cost basis showing zero, potentially resulting in an inflated yield reported to the IRS. Taxpayers must keep detailed records of their cryptocurrency transactions to accurately report taxable gains or other income.

[if !supportLists]1.1.2 [endif]Form 8300

IRC Section 6050I requires a person or business to file Form 8300 for receiving more than $10,000 in cash in one transaction or two or more related transactions, which needs to be filed with the IRS Criminal Investigation Division within 15 days. IIJA Section 80603 amends IRC Section 6050I, Section (d) by expanding the Form 8300 reporting requirements to include digital asset transactions. For example, under the new rules, if an individual buys a single non-fungible token (NFT) directly from an artist for $15,000 in Bitcoin, the seller will be required to submit Form 8,300 within 15 days to report receipt of cryptocurrency. In order to accurately complete Form 8300, the seller will need to collect information, including, but not limited to, the buyer's name, taxpayer identification number, date of birth, and address. For the purposes of the $10,000 limit, all transactions that occur within 24 hours between two parties with a transaction over $10,000 will be considered as related party transactions.

Failure to comply with the rules set forth in Section 6050I(d) is at risk of significant penalties. Negligent failure to file Form 8300 may result in fines of up to $280 per transaction, up to a maximum of $3,302,000 per calendar year. Willful failure to disclose transactions covered by Section 6050I(d) may result in civil and criminal penalties, as well as felony prosecution. Willful neglect of a Form 8300 report may result in a civil penalty equal to the cash value received in the transaction, and this provision applies to each intentional non-compliance. Willful disregard of reporting requirements is punishable by criminal penalties of $25,000 or $100,000, and/or five years in prison for individuals and companies. Penalties are also available for individuals and companies that cause or attempt to cause an industry or business to fail to file a required report, cause an industry or business to file a prescribed report that contains a material omission or erroneous statement of fact, or attempt to structure a transaction in a way that avoids the reporting requirements of Section 6050I(d). These violations may result in criminal penalties of up to $100,000 for individuals, up to $500,000 for companies, and/or three years in prison.

[if !supportLists]1.2 [endif]Scope of the new crypto tax law

The new rules equate the digital asset reporting rules with the "cash" reporting rules, and both parties to a crypto transaction need to provide each other's information. This is an unusual law, and although it is part of the tax code, it is not really a tax provision. First, unlike other IRS information reporting requirements, transaction reports must be submitted within 15 days, and violating this provision would be a felony, and second, it is not limited to "brokers" or crypto exchanges, it applies to all businesses, including individuals. The only ones who are not bound by it are banks and financial institutions.

[if !supportLists]1.3 [endif]Reporting requirements for the new crypto tax law

Under the new law, anyone who trades or does business must report the transaction to the IRS if they receive $10,000 or more in cryptocurrency. The report must include comprehensive details, such as the name, address, and social security number of the person receiving the funds, the amount of the transaction, and the date and nature of the transaction. Individuals who fail to file the necessary reports within 15 days of receiving such transactions may face felony charges.

[if !supportLists]2. [endif]What are the circumstances related to the new reporting obligations?

[if !supportLists]2.1 [endif]"Broker"

All cryptocurrency exchanges (Coinbase, Robinhood, etc.) are now considered "brokers" on the same basis as traditional brokers. Specifically, the bill states that a "broker" is "any person responsible for providing services to make digital asset transfers on behalf of others on a regular basis," but there is no clear scope, and app developers, wallet providers, and miners may also be classified as "brokers."

[if !supportLists]2.2 [endif]Tax treatment of "digital assets" under the new regulations

A "digital asset" is defined as "any representation of a number that is recorded in a cryptographically protected distributed ledger or any similar technology". Digital assets are treated like capital gains/losses on securities. In the past, digital assets were classified as property and were therefore taxed on the basis of gains or losses. The tax treatment of digital assets is now essentially the same as before: capital gains must be taxed. In other words, the new rules only affect the declaration, not the tax treatment.

However, securities also face regulation by the U.S. Securities and Exchange Commission (SEC), which is not mentioned in the legislation. The SEC will require traditional securities companies such as stocks to submit quarterly reports, provide prospectuses detailing risks, etc. There are no clear rules as to whether cryptocurrencies are required to file similar documents with the SEC.

2.3 Information Reporting Obligations of Crypto Exchanges

Crypto exchanges are required to provide the IRS with the information of their customers. The new tax rules instruct the IRS to report the following information: (1) the name, address and phone number of each customer, (2) the gross proceeds from any sale of digital assets, and (3) the capital gain or loss, and whether the capital gain or loss is short-term (held for one year or less) or long-term (held for more than one year).

2.4 Legal consequences of non-reportingInformation Reporting Obligations of Crypto Exchanges

Crypto exchanges that fail to report such information in accordance with the regulations will receive severe penalties. Form 1099-B: Failure to file as required will result in a penalty of $250 per customer, up to a maximum of $3,000,000 ("Failure to Provide a Correct Payee Statement," pursuant to 26 U.S.C. § 6722). Form 8300, over $10,000, everyone needs to report, negligently fails to file Form 8300, willfully fails to disclose transactions, intentionally ignores Form 8300 reporting, willfully ignores reporting requirements, etc., all face serious penalties, fines, or criminal liability. Before the law was implemented, cryptocurrency advocacy group CoinCenter filed a lawsuit challenging its constitutionality. The central argument made by the Coin Center is that the new law is vague and poses significant compliance challenges for crypto users and businesses. They argue that the law lacks the necessary clarity given the huge diversity of players in the cryptocurrency space, from casual traders to miners and validators. In addition, the IRS did not provide adequate guidance for its enforcement. As of now, the outcome of Coin Center's lawsuit remains uncertain, and it remains to be seen whether it will win the case.

3.The impact and potential consequences of the new crypto tax law

The main objective of the new tax law is to collect information on users of crypto assets. It also plays an important role in the fight against crime, and the government can use the reports received to investigate suspicious activity. The law marks a significant expansion of the IRS's ability to monitor cryptocurrency transactions, as the agency has long been concerned about the possibility of cryptocurrencies being used for tax evasion. With this enforcement, the IRS now has a powerful tool to combat tax evasion involving cryptocurrencies.

However, the implementation of the law could create challenges for adoption and innovation in the cryptocurrency space. The $10,000 threshold may discourage many individuals and entities from using Bitcoin, USDT, or Ethereum, knowing that every transaction must be reported to the IRS. This concern could hinder the growth and development of the cryptocurrency industry.

At the same time, the implementation of the law has provoked mixed reactions within the crypto community. On the one hand, it strengthens the regulatory framework and may address tax evasion. On the other hand, it may discourage some users from participating in the cryptocurrency market due to reporting requirements, which may hinder the growth and innovation of the cryptocurrency industry. As a result, the ever-changing U.S. federal income tax implications and reporting obligations need to be considered for the rapidly growing popularity of virtual currencies. The tax implications of virtual currencies are complex, and transactions can lead to unintended tax consequences.