IRS’s new rules for crypto taxation

• US citizens must now report cryptocurrency transactions over $10,000 to the IRS within 15 days, effective from December 31.
• For individual investors, this new rule means a heightened level of vigilance is necessary to avoid legal repercussions.
• Research in 2022 indicated a low level of tax reporting among crypto investors

The United States Internal Revenue Service (IRS) has implemented new rules requiring the reporting of digital asset transactions worth more than $10,000.

This development, a part of the bipartisan infrastructure bill signed by President Joe Biden, marks a pivotal moment for crypto exchanges, custodians, and individual investors alike.

The infrastructure bill, passed in 2021, broadens the scope of information that brokers, including many crypto exchanges and custodians, must report to the IRS.

The crux of this mandate is that any crypto transaction exceeding $10,000 needs to be reported, with the sender’s personal details such as name, address, and social security number included. This requirement is set to address the tax gap in the United States and is expected to enhance transparency in digital asset transactions.

Challenges and Controversies

While the intentions behind these new regulations might be clear, the execution and implications are far from straightforward. Jerry Brito, the executive director of Coin Center, has voiced concerns about the feasibility of complying with these requirements.

Key questions arise, especially in scenarios involving miners or validators receiving block rewards or users engaging in decentralised crypto exchanges. Identifying and reporting the necessary details in such cases could be complex and, at times, practically impossible.

Moreover, the law stipulates that failure to comply or incorrect reporting could lead to felony charges, intensifying the stakes for all parties involved.

These regulatory shifts come in a climate where cryptocurrency tax compliance has been historically low. Research firm Divly reports that in 2022, only about 0.53% of cryptocurrency investors declared their trading or investing activities to tax authorities globally. This low level of compliance has likely spurred the U.S. government to enforce stricter regulations to curb evasion and promote transparency in this burgeoning financial sector.

Coin Center’s Proposition

To mitigate the potential complications, Coin Center has proposed a de minimis exemption for smaller transactions and has suggested that the government should not apply the same reporting requirements to the second parties involved in crypto transactions. This suggestion aims to simplify compliance while maintaining the essence of the regulation.

Corporate Compliance

On the corporate front, the Financial Accounting Standards Board (FASB) has introduced new rules requiring companies to measure their crypto assets at fair value, to be implemented by 2025. This move is designed to provide a more accurate reflection of the worth of digital currencies like Bitcoin and Ethereum. Companies have the option to adopt this valuation method earlier, allowing for greater flexibility and financial precision.