How cryptocurrency sales should be reported on Forms 1099 has been a topic of debate for almost as long as cryptocurrency has been part of the lexicon. For several years, Treasury Department officials have indicated that the government was working on proposed regulations that would ultimately require reporting on sales of cryptocurrency, presumably on Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions. There were some indications early in the process that they could be reportable on Forms 1099-K, Payment Card and Third Party Network Transactions.
In August, the discussion about potential Form 1099 reporting on sales of cryptocurrency and other digital assets appeared to come to a crescendo. It included much-debated and somewhat detailed language in the Senate-passed Infrastructure Investment and Jobs Act—the infrastructure bill—that would require Form 1099-B and cost-basis reporting on digital assets sold by customers of brokers. This followed on the heels of a proposal in the Biden administration’s FY 2022 budget and explanation of revenue proposals, the Treasury Green Book. It essentially assumed broker reporting on crypto asset sales was already required and would call for brokers that report on crypto asset sales and exchanges to also report regarding certain foreign beneficial owners of U.S. entities holding accounts with crypto assets.
However, despite the crescendo, since the proposed Treasury regulations have not yet been issued, the infrastructure bill is currently in flux. And budget proposals in the Treasury Green Book are not legislation. There is no clear requirement to report sales of cryptocurrency on Forms 1099 at this time.
Of course, the lack of a clear Form 1099 reporting requirement on cryptocurrency sales does not mean that gains from those sales do not represent taxable income. However, the correlation between third-party reporting of income on Forms 1099 and the chance the income will be voluntarily reported on income tax returns is well documented. Hence, there is a need for clear reporting requirements to help close any revenue gaps resulting from the failure of investors to recognize gains on the sales of their cryptocurrency and other digital assets.
It usually takes several years for new information reporting provisions to be implemented. After new legislation is enacted, Treasury typically takes at least a year to publish proposed regulations implementing that legislation. Then the public has an opportunity to comment, and Treasury reviews those comments and refines the regulations before they are finalized. After the final regulations are published, the financial services community generally needs, and is given, at least 18 months to build or modify the systems needed to comply, with an effective date almost always starting at the beginning of a new calendar year. Therefore, although the Treasury Green Book and the infrastructure bill anticipate an effective date of Jan. 1, 2023, for any new cryptocurrency reporting provisions, that timing seems unlikely. Instead, an ultimate effective date of Jan. 1, 2025, with the first filings due in 2026, may be more reflective of past implementation schedules.
Passive U.S. Entities
Treasury’s Green Book would require brokers that report crypto asset sales and exchanges to report certain beneficial owners of U.S. entities holding accounts with crypto assets. Specifically, the proposal would require brokers, including crypto asset exchanges and hosted wallet providers, to report information on certain U.S. passive entities and their “substantial” foreign owners. To do the proposed reporting, brokers would presumably have to look through U.S. passive entities, whether they are U.S. corporations, partnerships, or trusts, to identify substantial foreign owners, much like they must currently look through foreign passive entities to identify substantial U.S. owners.
Backup Withholding on Sales
Should the sale of cryptocurrency and any other digital assets become subject to Form 1099 reporting, it is more than likely that brokers will be required to obtain Forms W-9, Request for Taxpayer Identification Number and Certification, from any new U.S. customers and probably from preexisting customers. Current practice varies widely across the industry, but it appears that most exchanges do not collect Forms W-9 at onboarding because Forms W-9 must be signed under penalties of perjury, which can be quite daunting for an inexperienced investor. In fact, many exchanges avoid the collection of any taxpayer identification numbers such as Social Security numbers because their customers fear identity theft.
However, when reporting is required on the sale of these assets, if a broker has not obtained the payee’s Taxpayer Identification Number “in the manner required” by law, then the broker would be required to withhold 24% of the proceeds of the sale. If they fail to withhold, they will become liable for the tax they should have withheld but did not. Note that such backup withholding is required on the gross proceeds from a sale, not on any potential net gains resulting from a sale. In other words, even if a customer recognizes a capital loss on a sale, the gross proceeds from that sale must still be subjected to backup withholding at a rate of 24%.
Digital Assets Treated as Cash
The Infrastructure bill would treat digital assets as “cash” for purposes of reporting “cash” received in the course of a trade or business. Currently, people engaged in a trade or business must report to the IRS on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, when they receive more than $10,000 in cash—or cash equivalents—in one transaction, or multiple related transactions. The infrastructure bill defines digital assets broadly, so this reporting requirement may ultimately include the receipt of digital assets beyond cryptocurrency. Therefore, this could become a fairly widespread reporting obligation since many companies are now considering whether they should accept cryptocurrency and other digital assets as a form of payment. Those companies should factor this potentially complex reporting requirement into those deliberations.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Debbie Pflieger is a Principal in EY’s Financial Services Organization. Debbie is EY Americas’ Tax Information Reporting and Withholding Services leader and consults with clients in the information reporting and withholding arena, assisting them to understand and comply with their many obligations in this area. She can be contacted at: firstname.lastname@example.org.
We’d love to hear your smart, original take: Write for Us