US crypto investors face lack of clarity as ‘impossible to comply with’ tax reporting rules kick in

As of January 1, all Americans must report personal information to the Internal Revenue Service when receiving crypto of over $10,000, according to Coin Center.

The “new year brings a new law that is not only unconstitutional but also virtually impossible to comply with as a result of inaction from the IRS,” the crypto advocacy group said in a blog post.

The new rules stem from amendments to Section 6050I of the tax code under the Infrastructure Act, which President Joe Biden — who has blasted “tax loopholes that help wealthy crypto investors” in the past — passed in November 2021.

Investors appear confused, however, over precisely who these rules apply to. Do they apply to any and all American individuals transacting in crypto in sufficient volume, or just businesses and professional traders?

And the stakes are high — failure to report receipt of $10,000 worth of crypto could result in a mandatory fine of up to $25,000 or even up to five years in prison, Coin Center said.

The confusion is particularly pressing as industry watchers anticipate the market to enjoy a bull run in 2024, which may compel more people to trade with crypto.

The reporting requirements will apply to anyone, including individuals, receiving digital assets over the $10,000 threshold in the course of “trade or business,” according to Coin Center’s executive director Jerry Brito.

What constitutes trade or business can be very broad.

Tax law scholar Abraham Sutherland, who has represented Coin Center, wrote that “trade or business” is a term found throughout the tax code but never legally defined.

Sutherland wrote in a research report that “entire legal treatises are devoted to parsing how the courts have, and might, apply the term to different factual situations,” adding that anyone doing regular trades for financial gains may be considered a trade or business.

“So it’s a mistake to think the statute applies only to those who ‘sell things and accept a certain form of value — cash or digital assets — as payments for those goods or services,” he wrote.

The rules apply to all digital assets, including non-fungible tokens, according to Sutherland.

Miners, stakers, and lenders are all at risk of being subject to reporting requirements, even though they may not have access to the information needed to fill out the report.

However, crypto tax software developer CoinTracker head of tax strategy Shehan Chandrasekra told The Block and Blockworks this week that the rules only apply to full-time professional traders.

Casual or hobbyist crypto investors in the US would not be considered to have a trade or business for tax purposes, as they have to make a tax election with the IRS, which “is only applicable to high-frequency stock traders at the moment,” he said.

The IRS has not issued any clarifications on who the rules apply to.

DL News emailed an IRS spokesman to confirm that the new rules have gone into effect and if more information would be forthcoming for taxpayers, but received no response.

Reporting guidance for the relevant form on the IRS website does not mention digital assets.

What do the rules say?

• Under the new rules, recipients of $10,000 or more in cryptocurrency in one or several trades must report that transaction to the IRS.
• Filers must report their own personal information — including name, social security number, and address.
• They must also verify and report the same information for the party who sent them the crypto.
• The report must be done within 15 days of the transaction.

Coin Center said the rules — adapted from a 1984 law on reporting cash transactions — aren’t suitable for digital assets, and will be almost impossible to comply with.

“Unfortunately for the time being there is an obligation to comply — but it’s unclear how one can comply,” Brito wrote on X, formerly Twitter.

“The existing form for ‘cash’ transactions isn’t applicable, and there are many unanswered questions like, what if you receive funds from a block reward or a DEX transaction? Who do you report as sender?”

Coin Center sued the Treasury Department over the Section 6050I amendments in 2022, saying that they would “impose a mass surveillance regime on ordinary Americans.”

The case was thrown out in July 2023 over threshold issues. Coin Center has said it will continue to fight the matter in court.

Where did the new rules come from?

The new reporting rules result from some amendments to the tax code that were slipped into the bipartisan Infrastructure Investment and Jobs Act — a massive law passed by the Biden administration in 2021.

The law authorised spending of $1.2 trillion to tackle the US’s crumbling bridges, roads, and railways, and expand high-speed internet access.

What does that have to do with crypto? The Joint Committee on Taxation estimated that by expanding taxation to the nascent crypto industry, the government could tap into as much as $28 billion of funding.

One of the amendments to the tax code resulted in the reporting requirements that went into effect this week.

The other expands the definition of “broker” to capture crypto entities and compels them to report personal information on their users.

Email the author at joanna@dlnews.com.