January 26, 2022

Volume XII, Number 26

Advertisement
Advertisement

January 26, 2022

Subscribe to Latest Legal News and Analysis

January 25, 2022

Subscribe to Latest Legal News and Analysis

January 24, 2022

Subscribe to Latest Legal News and Analysis

New Cryptocurrency Information Reporting Regime Required on Form 1099 and Form 8300

On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (the “Infrastructure Bill”), which significantly expands tax information reporting for certain cryptocurrency transactions. The Infrastructure Bill includes an information reporting requirement for cryptocurrency asset exchanges and custodians on an IRS Form 1099, and an information reporting requirement for certain persons who accept large payments in cryptocurrency in such person’s trade or business on an IRS Form 8300. The effective date of these changes will apply to any information return required to be filed after December 31, 2023.

Form 1099 Reporting

Reporting Requirements

Currently, the tax code does not specifically require cryptocurrency exchanges to report taxpayer information to both the IRS and their customers. However, beginning with the 2023 tax year, they will be required to collect taxpayer identifying information from their customers, so that they can properly issue Forms 1099 at the end of each tax year. Specifically, the following type of information will be required to be reported:

  1. name, address, and phone number of each customer;

  2. the gross proceeds from any sale of digital assets; and

  3. capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).

The Infrastructure Bill redefines the term “broker” under IRC 6045 to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”. Under the Infrastructure Bill, cryptocurrency exchanges will be treated similar to traditional brokerage houses.  The Infrastructure Bill doesn’t specifically identify the type of information return that must be filed, but it likely will be similar to IRS Form 1099-B (Proceeds from Broker).

Penalties

The IRS imposes a penalty up to $250 per customer, up to a maximum $3 million penalty, for failure to timely file a correct Form 1099 with the IRS under IRC 6721 and a penalty up to $250 per customer, up to a maximum $3 million penalty, for failure to timely furnish a correct Form 1099 to the customer under IRC 6722. These penalties may be reduced if such failures are timely corrected.

If the failure to file and furnish a correct Form 1099 is determined to be intentional, then the IRS imposes a penalty with respect to each such failure equal to $500 or, if greater, 5% of the aggregate amount of the items required to be reported correctly under IRC 6721 and IRC 6722. There is no maximum penalty for these intentional failures.

In addition, if it is determined that a person willfully violated the required reporting on an IRS Form 1099, in addition to other penalties provided by law, such person shall be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.

Form 8300 Reporting

Reporting Requirements

The tax code currently requires reporting on an IRS Form 8300 by any person who, in the course of such person’s trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions) by the 15th day after the date such cash was received. The Infrastructure Bill expands the definition of cash to include “digital assets” which is defined in the Infrastructure Bill as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”

The IRS Form 8300 requires reporting of:

  1. the identifying information of the individual from whom the cash was received, including such individuals name, address, occupation, and taxpayer identification number;

  2. the identifying information of the person on whose behalf the transaction was conducted; and

  3. a description of the transaction and method of payment.

Under current law this reporting is typically reserved for physical, in person, payments in cash. This expansion of the definition of cash to include cryptocurrency could result in requiring reporting for digital payments in cryptocurrency and the information required to be reported on the Form 8300 may be more difficult to collect.

Penalties

The IRS imposes a penalty up to $250 per customer, up to a maximum $3 million penalty, for failure to timely file a correct Form 8300 with the IRS under IRC 6721. These penalties may be reduced if such failures are timely corrected.

If the failure to file a correct Form 8300 is determined to be intentional, then the IRS imposes a penalty with respect to each such failure equal to the greater of $25,000, or the amount of cash received in such transaction (or related transactions) to the extent the amount of such cash does not exceed $100,000.  There is no maximum penalty for these intentional failures.

In addition, if it is determined that a person willfully violated the required reporting on an IRS Form 8300 for cryptocurrency payments in excess of $10,000, in addition to other penalties provided by law, such person shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Next Action Steps:

Cryptocurrency asset exchanges and custodians need to begin preparing to comply with these information reporting requirements on the IRS Form 1099. This preparation includes beginning to collect information from their customers, such as social security numbers and addresses. In addition, these companies will need to develop an internal process to keep track of the holding period and the buy and sell prices of the digital assets in its customer’s accounts.

Companies that currently receive, or may in the future receive, large payments in cryptocurrency need to be aware of the upcoming requirement to file an IRS Form 8300 upon the receipt of more than $10,000 worth of cryptocurrency and should begin to educate its employees on this upcoming filing requirement.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XI, Number 347
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Timothy L. Jacobs Attorney Hunton Andrews Kurth Washington DC Richmond
Partner

Tim’s practice focuses on all areas of federal income tax law, with emphasis on tax controversy and litigation matters.

Tim served as an attorney-advisor to the Hon. Michael B. Thornton (2003-2005) and the Hon. Robert P. Ruwe (2001-2003) on the US Tax Court, and has particular knowledge in the areas of Tax Court practice, procedure, and litigation. Tim practices regularly in the Tax Court and the US Court of Federal Claims and also is admitted to practice in the US Supreme Court, and the US Courts of Appeals for the Third, Fourth, Sixth and...

202-955-1669
Jason Feingertz Tax Attorney Hunton AK Law Firm
Associate

Jason maintains a general corporate tax practice, advising clients on state, federal and international tax matters.

He represents clients in various industries in tax planning, audit defense, and tax litigation. Jason also advises clients on federal income tax issues in mergers and acquisitions, including tax-free reorganizations. 

When focusing on state and local tax matters, Jason provides advice in the areas of multistate income, franchise and sales and use taxes, with emphasis in New York and New Jersey. In addition...

212-850-2823
Tim Strother Attorney Business Transactions Hunton Law Firm Houston
Associate

Tim’s practice includes experience in various federal income tax matters with an emphasis on domestic business transaction planning.

Tim counsels publicly-traded partnerships (MLPs) on a wide variety of tax issues, including formation, qualification, and acquisition and recapitalization activities. Tim also handles the tax aspects of public and private offerings of debt and equity securities and has advised companies on numerous public and private acquisitions, dispositions and joint ventures, including tax-free reorganizations and like-kind...

713-220-3720
Advertisement
Advertisement
Advertisement