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WOLF & CO Alerts Looking Ahead: Expanding Cryptocurrency and Digital Asset Reporting Requirements

Looking Ahead: Expanding Cryptocurrency and Digital Asset Reporting Requirements



The Infrastructure Investment and Jobs Act (HR 3684) passed in 2021 extends broker information reporting rules to cryptocurrency exchanges, custodians, and platforms.

Current Reporting and Changes Explained

The existing broker rules required that if you hold a stock brokerage account, your broker is required to report the details of transactions – e.g., sale proceeds, dates of acquisition/sale, and the charter of the gain or loss to both you and to the Internal Revenue Services (IRS) – using Form 1099. Taxpayers would then take that information and use it to report dividend income, as well as capital gains transactions on their annual tax filing. The IRS would “match” the information provided by the broker and then reported on the annual tax filing to ensure all transactions were reported.

Additionally, if securities are transferred from one broker to another, “broker-to-broker” reporting rules require that the prior broker provide a statement containing relevant information, namely tax basis, acquisition dates, etc. to the new broker.

Until now, the various cryptocurrency exchanges, custodians, and platforms may have led to inaccurate annual tax returns and misreported information.

The Infrastructure Investment and Jobs Act (the “Act”) details the new reporting for digital assets, which for purposes of this reporting is any digital representation of value recorded on a cryptographically secured distributed ledger (blockchain) or other similar technology. Most commonly this includes cryptocurrency and potentially some non-fungible tokens. What is interesting is that the IRS is allowed to modify this definition.

The Act expands the definition of “broker” to include businesses that regularly provide any service accomplishing transfers of digital assets on behalf of another person – i.e., cryptocurrency exchanges and other platforms. As such, starting in 2023, any platform or exchange on which you can buy and sell cryptocurrency will have to report these transactions to the IRS and you by the end of the year.

Unwelcomed Change for Platforms and Exchanges

These new reporting requirements mean cryptocurrency exchanges, custodians, and platforms will have to gather information from users – specifically names, addresses, phone numbers, and social security numbers – to meet their reporting obligations. Quite simply put, platforms and exchanges need to start requesting the Form W-9 – Request for Taxpayer Identification Number (or the appropriate W-8 Forms from Non-Residents) from users.

For a system initially built on the transparent but anonymous nature of the blockchain, this is a marked shift in exposure and reporting.

What Does This Mean for You?

Taxpayers should expect exchanges/platforms to start reaching out soon to request identifying information to support this reporting.

From an income reporting standpoint, the increased reporting for brokers should not adjust any tax reporting as these transactions were already required to be reported in prior years. If transactions were not previously reported, a discussion should be had with your engagement teams to determine the best path for correction.

Please reach out to your engagement teams with any questions on this evolving matter.

Rita Ryan, J.D., LL.M.
International Tax Senior Manager
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1(617) 419-4202
[email protected]

Kristin L. Stone, CPA, MST
Principal
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1 (617) 428-5464
[email protected]

Ryan P. Brunell, CPA
Principal
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1 (617) 933-3348
[email protected]