Cryptocurrency Reporting Requirements Update

New Reporting Requirements for Crypto Transactions Included in Senate Infrastructure Bill

When the Senate passed its $1 trillion infrastructure bill last week, it included proposed changes to information reporting for the cryptocurrency community – changes ultimately designed to better regulate and streamline overall taxation processes for this evolving group.

The bill would require cryptocurrency exchanges (or brokers) to report transactions to the IRS by filing an information return. If passed, reporting would be required beginning in 2023. Businesses would also need to disclose trades of digital assets in excess of $10,000 under the proposed changes.

The requirement is designed to open up the flow of information from exchanges to the IRS. While the proposed changes do not directly impact individual crypto investors, they could ultimately lead to higher expectations for individual tax reporting.

Individuals who trade Bitcoin and other virtual currencies are required to indicate on their income tax returns whether they sold or exchanged digital assets and must pay taxes on any capital gains associated with those assets, but comprehensive guidance surrounding crypto taxation remains vague at this point in time. The IRS has indicated it is working to provide further guidance.

Unlike stock exchanges, cryptocurrency brokers are not currently required to provide detailed tax reporting to investors, but if reporting requirements are adopted, penalties could be steep.

Under current guidelines for similar reporting mechanisms (e.g. employers who provide W-2 information), failure to report – both to the IRS and the payee – is penalized per return. With potentially millions of individual crypto investors impacted, an exchange’s financial standing could be severely hampered. Penalties are infinitely larger if the IRS determines there was intentional disregard.

After passage in the Senate, the bipartisan infrastructure bill now heads to the House, where changes could come.

We’ll be closely monitoring developments related to this bill and its resulting impacts to our customers. Stay tuned for more information, and please feel free to connect with a member of MFA’s Tax Team in the meantime.

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