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 …….