Cryptocurrency and other virtual assets have encountered new IRS scrutiny over recent years. The newest tax rules include a special reporting threshold that’s befuddling many crypto-holding wealthy clients, advisors say.
Generally, a client in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must electronically file an IRS Form 8300, the agency says, adding that the reporting will help the IRS and the Treasury’s Financial Crimes Enforcement Network (FinCEN) fight money laundering.
Part of the infrastructure bill signed by President Biden in 2021, the requirement is effective as of this year, and applies to digital assets and all varieties of businesses receiving payments from U.S. persons or entities. (Religious exemptions and hardship waivers are available, the IRS adds.) Failure to file is a felony.
“Basically, transactions involving digital assets of $10,000 or more must be reported within 15 days,” said Phil Drudy, lead managing director for CBIZ MHM’s New York tax department.
“Clients that are active in digital assets are confused about what needs to be reported and when it needs to be reported, as are most professional advisors," he said. "This is especially true when the digital assets are in a foreign account or environment. There’s confusion as to when and if the FATCA and FBAR rules apply. And, given the draconian penalties associated with these potential foreign filings, there is a heightened level of concern.”
“Where it gets interesting is [that] the term ‘trade or business’ is broadly defined and subject to interpretation,” writes Salt Like City-area CPA Trevor Ward in his LinkedIn blog. “The courts and IRS often look at several factors to determine if any activity qualifies as a trade or business, including regularity and continuity of the activity; intent to make a profit; [and] level of activity.”
Other details the IRS uses to determine a business include carrying on the activity in a businesslike manner with complete and accurate books; dependency on the activity for a livelihood; profitability in similar activities in the past; and expectation of future profit from appreciation of assets.
Observers have added that most casual crypto investors in the U.S. do not have a “trade or business” for tax purposes and that becoming one—which some consider crypto-trader status—requires a special tax election with the IRS.
“Retail traders typically aren’t seen as a trade or business,” Ward added, “but things could get tricky if you trade frequently, run validator nodes, engage in staking and so on.”
“The new reporting rules are related to trade or business activities, so the ones who need to be aware of the reporting are those that are active in the digital asset business,” Drudy said. “The issue we as professionals face is normally in the tracking and administration of the digital assets.”
Crypto in general is figuring larger in IRS scrutiny of overseas assets and tax dodging.
“Many [clients] are aware of the heightened scrutiny, but I’m not sure how well they understand the requirements,” Drudy said. “Additional guidance is needed to develop clarity as to what needs to be reported and when. I believe the IRS is still trying to gather information to help them formulate guidance.”
Another sources of confusion is whether crypto exchanges or those who receive cash payments from a crypto transaction via third party are subject to the filing rule? When exactly, Ward also asked, will a transaction with a digital asset be considered a trade or business transaction versus an investment?
“I always tell clients that are invested or active in the digital asset environment that the rules are evolving and changing and that you need to revisit the issues regularly,” Drudy said.