US Congress passes infrastructure bill containing major tax reporting requirements for the cryptocurrency industry

Buried within the infrastructure legislation that the House of Representatives passed on Nov 5 are new measures that would extend Form 1099-B and cost-basis reporting requirements to all “digital assets” such as Bitcoin and Ethereum. The requirements, which are expected to raise $28 million of revenue for the bill, would impose tax reporting obligations on crypto exchanges, software developers, and others in the industry. Currently, there are no reporting requirements for cryptocurrency exchanges, although some exchanges may send you tax forms (for example, Coinbase sends 1099-MISC, which only covers rewards received from Coinbase, not capital gains). The new reporting requirement does not take effect until January 1, 2023, and thus affects tax returns filed in 2024. Transactions in 2021 and 2022 are exempt from the new reporting requirements. This means that exchanges are not required to send you Form 1099-B until 2024 (for 2023 taxes), although exchanges may start complying earlier.

Starting on January 1, 2023, a “broker” will be required to report transactions involving “digital assets” for the calendar year to the IRS on Forms 1099-B or another similar tax form. The legislation would treat digital assets as “specified securities.” This means brokers would have to track and report such information as the identity of customers as well as the cost basis and gain/loss from the sale of digital assets. Brokers would also be required to report transfers of digital assets to non-brokers. Digital assets would include any “digital representation of value” recorded on a blockchain or similar technology. This would cover all cryptocurrencies and potentially other forms of digital assets such as non-fungible tokens (NFTs). As with traditional Form 1099-B reporting, taxpayers may be subject to substantial penalties for failure to file or timely file an informational return with the IRS.

Miners verify Bitcoin transactions by solving complex mathematical puzzles in exchange for a specified amount of Bitcoin. Because miners are verifying thousands of transactions per day and do not have access to the identities of users during the process, they would not be able to produce the information required to be reported under the Senate bill. It remains to be seen whether the U.S. Treasury and IRS will narrow the interpretation of broker to exclude miners, developers, and other players without the resources to comply with the new reporting requirements.

Finally, the legislation would modify existing rules and would apply to digital assets as cash. This means that anyone who receives more than $10,000 of cash (including digital assets) in one or multiple transactions must file a Form 8300 return with the IRS.