The Infrastructure Investment and Jobs Act[1] (Infrastructure Act) amended provisions in the Internal Revenue Code (the Code) to improve tax administration and tax compliance with respect to trading and investing in digital assets.
The amended provisions in the Code require “brokers” to report information on transactions in digital assets, meaning cryptocurrencies, NFTs, and other crypto-assets. Cryptocurrencies are convertible virtual currencies that can be used as payment for goods and services, digitally traded between users, and exchanged for, or into, real currencies or digital assets.
“Brokers” is defined to include any person who, for money or other compensation, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.
“Digital assets” means “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology” as specified by the Secretary of the Treasury. That would include digital assets for which transactions are recorded on blockchain technology.
Brokers are already required to file Form 1099B informational returns, which simply report to the IRS any transactions in securities. The Infrastructure Act now will require brokers to include the same information on digital assets.
Brokers are currently required to furnish statements to customers (“payees”), showing the details regarding gross proceeds, the adjusted basis of certain assets sold, and other information, with respect to securities. These “payee statements” will now also cover information on digital assets.
IMPORTANT UPDATE: On December 26, 2022, Treasury and the IRS announced that brokers are not required to file these digital asset informational reports until final regulations are issued under the Internal Revenue Code.
HOWEVER: Taxpayers are not provided with any relief from their reporting requirements. For the tax year 2023, taxpayers must report any income they receive from digital asset transactions on their Form 1040 or 1040-SR, and must answer the question on page 1 of the Form. In order to disclose the information required on the tax return, the taxpayer must keep track of their “basis” in the digital asset, which generally means the value paid for the asset or “cost basis.” If the taxpayer subsequently sells the asset, the difference between the taxpayer’s basis in the asset and the amount received in the trade will constitute “income” that must be reported to the IRS.
The bottom line is this: If you trade in any digital assets, such as cryptocurrency, keep track of what you paid for it. Keep records about each transaction, including a precise description of the asset, the date, whether it was a purchase or sale (or gift), the amount paid or received, the platform on which the trade took place, and the identity of the other party to the transaction and/or any broker involved. You may need this information, especially if you are audited.
Remember also that trading in cryptocurrencies is highly risky and largely unregulated.
[1]Pub. L. No. 117-58,135 Stat.429, 2339 (2021)