The Internal Revenue Service will no longer rely on the honour system when it comes to reporting your cryptocurrency transactions. The IRS will receive notice of any potentially taxable digital asset transactions you make starting in tax year 2023 if they are reported to the agency by a third party.
If you’ve ever worked or invested in the stock market, you’re probably aware that the money you earn is reported to the federal government. This is due to the fact that you and the Internal Revenue Service receive a W-2 form from your employer, which shows your annual earnings, and a Form 1099 from your broker, which reports your stock trades.
At the time of this writing, however, there were no such third-party reporting rules in place for cryptocurrency exchanges and transfers — or for any other digital assets, such as nonfungible tokens (NFTs).
According to a provision in the recently passed infrastructure law, crypto industry players who broker digital asset transactions must issue 1099-B tax forms for their customers’ accounts. As a result, you will receive your first 1099-B tax form in early 2024, which will reflect your 2023 transactions.
Additionally, in an effort to make it more difficult to launder money, the new law requires businesses to file a report with the Internal Revenue Service whenever they receive more than $10,000 in cryptocurrency in a single transaction (or in two or more related transactions), just as they must when they receive more than $10,000 in cash. Failure to comply with this requirement can result in a federal felony prosecution.
These new reporting rules will have a variety of consequences for investors who trade digital assets.
The new reporting requirements represent a possible upside for cryptocurrency investors in two ways: first, they are an indication that crypto is here to stay, and second, they are a sign that crypto is here to stay. Furthermore, given the difficulty of trying to keep track of all your transactions, receiving a 1099 may be beneficial to you.
However, those who wish to keep their transactions secret on principle, or those who have not satisfied their tax obligations, will suffer a loss of anonymity as a result of this change.
Whenever you open an account with a bank or a brokerage firm, you must supply a great deal of personal information, which is then cross-checked to ensure that you are who you claim to be. Among other things, you must enter your legal name, address, phone number, Social Security number or other taxpayer identification number, as well as a valid email address.
However, when it comes to setting up cryptocurrency-related accounts, the information you’re requested to provide varies from platform to platform.
Erin Fennimore, head of information reporting at TaxBit, a bitcoin tax software supplier, explained that “up until this year, it was rather usual to be able to open [an account or digital wallet] with just your name and email.”
When the year 2023 arrives, many of these things will have changed. As Fennimore explained, “you will be asked for personal information that you have most likely never been asked for in the past.”
Furthermore, the platforms that will be required to report on your transactions will be required to verify that you are who you claim to be.
In addition, when a digital asset is transferred from one broker to another, the transferring broker will be required to issue a statement to the receiving broker that includes information on the basis and holding period of the transferred asset in order for the receiving broker to meet its 1099 reporting obligations under the Internal Revenue Code.
Because not every cryptocurrency transaction is a taxable event, not every cryptocurrency transaction will necessitate third-party reporting.
“The simple act of purchasing cryptocurrency is not taxable or reportable under the law. You must do something with it, such as sell it or exchange it, before it becomes useless “Fennimore said himself.
Nevertheless, because a reporting entity may not have access to all of the relevant information, “it will be a practical challenge to always have the tax basis for each trade or transfer,” according to Christopher Murrer, an associate in Baker McKenzie Zurich’s Fintech group. “It will be a practical challenge,” he added.
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