The crypto industry has faced a number of challenges over the past few months. In June, the price of bitcoin dropped to its lowest value in nearly two years, shaking confidence and leading to layoffs in platforms and supporting organizations.
Despite the setbacks, crypto is still huge—according to CoinMarket, the global crypto market cap is $1.1 trillion or more, depending on the day. That’s about three times as much as the total amount of US corporate taxes expected to be collected in 2022.
Early Efforts
Compared with those numbers, IRS collections from crypto have been unremarkable. In 2017, as part of an effort to obtain taxpayer information from Coinbase, US Magistrate Judge Jacqueline Scott Corley in San Francisco cited IRS claims that “only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year.” Judge Corley wrote that “[t]he IRS has a legitimate interest in investigating these taxpayers.”
Changes to Form 1040
The Coinbase case was just one shot in a series of attempts by the IRS to collect information on crypto users. For the 2019 tax year, the agency announced a cryptocurrency compliance measure for taxpayers with a new question on Form 1040 at the top of Schedule 1: At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
In 2020, the IRS moved the yes-or-no question to the front page of Form 1040 where it currently sits—with a tweak. It now reads: At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? That means all taxpayers, even those without adjustments to income or other investments on Schedule 1, must answer a question about cryptocurrency use.
New Reporting Requirements
More changes are in store. While some platforms already provide information about gains and losses to taxpayers, the 2021 infrastructure law attempts to standardize reporting for tax purposes. The intent was to ensure that the IRS gets info and that crypto investors receive the same tax documents that stock traders receive. According to a 2021 letter from a group of senators, increased reporting would make it easier for taxpayers to “file their taxes more easily and promote higher compliance.”
Form 1099-DA
While the IRS hasn’t yet released a draft of the proposed form, we have some details. IRS CI Deputy Chief James Robnett confirmed this summer at the annual New York University School of Professional Studies Tax Controversy Forum that the IRS is working on the form—to be called Form 1099-DA (Digital Asset). The form will be used to report taxpayer cryptocurrency activity and will include the kind of information you’d traditionally see on Form 1099-B, like number and kind of assets, cost basis, fair market value, and holding period.
Under the law, the new reporting requirement begins in tax year 2023, which means Form 1099-DA should land in the hands of taxpayers in 2024—assuming that the IRS remains on schedule. However, rumblings about a potential delay in implementation are growing louder.
Definition of Broker
There are clearly still issues to work out. Notably, there is concern that the definition of “broker” in the law is overly broad. Calls for clarification, including whether additional legislation will be required, have grown louder after hopes that it would be resolved by the end of 2021 were soundly dashed.
Earlier this year, the Treasury Department released its Green Book containing the current administration’s proposals, which, it notes, “are not intended to create any inferences regarding current law.” A section of the proposals focused on crypto—including noting that more crypto guidance will be coming.
Additional Suggestions
This week, Coinbase made public its response to Treasury’s request for comment on a recent Executive Order, Ensuring Responsible Development of Digital Assets. Among other things, Coinbase suggested that “given the use cases for cryptocurrency as a medium for payment,” a consistent de minimis rule for reporting would reduce the compliance burden for taxpayers and the processing burden for the IRS. The Latin phrase de minimis translates roughly to “of little importance”—in the tax world, the term is used to indicate when the IRS considers an item “so small as to make accounting for it unreasonable or impractical.” Such rules apply to specific Form 1099 reporting, like the $600 threshold for Form 1099-MISC.
In 2018, the AICPA made a similar recommendation to the IRS, suggesting that there be an exclusion like the one for foreign currency for personal transactions. That would account for the real concern that tracking the basis and value of cryptocurrency for purchases can be time-consuming and burdensome for what is, in some cases, a small amount of taxable gain or loss.
Pointing specifically to decentralized finance, or DeFi, Coinbase also suggested in its response that reporting alternatives to Forms 1099 should be considered to address the concern that taxpayers may not have or be able to receive complete information.
What Next?
So what should taxpayers do while these reporting requirements are sorted out and—hopefully—clarified? My advice remains the same: Keep excellent records, not just in 2022 but beyond. Even when brokers—whatever that means—issue reporting forms, the information may not be all you need. For example, taxpayers may find that their cost basis isn’t properly tracked and reported if they use multiple platforms or wallets.
And, of course, pay attention to rule clarifications and changes. They matter. In addition to regular Bloomberg Tax crypto updates, you can check the IRS FAQs on virtual currency.
This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.