IIJA’s New Digital Asset Reporting Requirement

digital assets

The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. One major provision of the IIJA includes a requirement that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions to the IRS. This will will require that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions for all digital assets starting in 2023.

Existing reporting rules. As might already be aware if you have a stock brokerage account, whenever you sell stock or other securities you receive a Form 1099-B at the end of the year reporting your security gains and losses. This Form 1099-B reports the details of transactions, such as sale proceeds, relevant sale or purchase dates, your tax basis for the sale, and the character of gains or losses (long-term, short-term, etc.). Additionally, if you were to transfer stock or securities from one broker to another, your old broker is required to provide your new broker with information on the holdings that were transferred, such as tax basis or date acquired.

Digital asset broker reporting. The IIJA expanded the definition of brokers to include Crypto Exchanges and other service providers that are providing transfers of digital assets on behalf of another person. This means that any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.

Transfer reporting. Sometimes you may have a transfer transaction that is not a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another Crypto Exchange, the transaction is not a sale or exchange. For that type of transfer, as with stock, the old Crypto Exchange will be required to furnish relevant basis and other information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. We expect that this filing will include generally the same information that is furnished in a broker-to-broker transfer.

What are Digital assets. For the reporting requirements, a “digital asset” is any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. The IRS can (and may) modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting. Historically, when a business receives $10,000 or more in cash in a transaction, that business is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA now requires that businesses treat digital assets like cash for purposes of this reporting requirement, for reporting that is due after December 31, 2023.

Closing. Some things to keep in mind: First, if you use a Crypto Exchange, and it has not already performed a KYC (Know Your Customer), expect it to do so soon. Second, the transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. Third, a reporting intermediary does not always have perfect information, especially when it comes to an entirely new type of reporting. Expect the first information reporting cycle for this reporting requirement to be a bit bumpy.

Remember that as your trusted CPA advisors, we are here to help you and can provide solutions for any challenges that may develop.