08/01/24

US: Crypto Tax Changes To Prepare For In 2024

As published on: forbes.com, Monday 8 January, 2024.

Crypto taxes are, yet again, making investors and tax advisors take notice as 2024 gets underway. With all of the headlines, both positive and negative, that have been swirling around the cryptoasset space it can be easy to overlook some of the tax changes that have already taken effect, as well as others that are coming shortly. It is even more confusing given the positions that some groups have taken related to staking or other crypto activities, arguing that such activities should not be considered taxable; this has been debunked in court as well through interpretation of the IRS tax code by multiple tax professionals.

Put another way, crypto taxes are complicated, always have been, and the online discourse only makes it more difficult for investors and tax advisors to get accurate data. As a general rule, and especially for crypto tax issues, investors should research and verify any statements made in online forums, and consult with a tax professional familiar with both crypto and the unique situation of the taxpayer.

One specific tax change is set to further muddy the waters, and it has already taken effect. Changes to IRS Section 6050I took effect for all transactions occurring after December 31, 2023 (for the 2024 tax year), with a large amount of discourse taking place via online forums following this realization.

Since the changes to Section 6050I are the clearest and most current challenges for crypto taxes, let’s dive into what crypto tax investors should keep in mind when talking tax advisors this year.

No Increase To Tax Liabilities
Despite all of the discourse and debate around these changes in tax circles the reality is that the changes to Section 6050I will have no impact on the tax liability owed by a certain individual or entrepreneur. An important caveat to that statement is that there will be no change to the tax liability assuming that the taxpayer in question has been consistently reporting and disclosing crypto transactions and income.

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The real changes that will result of the changes to Section 6050I are instead centered around the quantity of information that will need to be reported to the IRS, and which counterparties will be responsible for the reporting of that data. To summarize, for qualifying transactions taxpayers will have to report the name, address, social security number, amount, date, and the nature of the transaction. This information must be reported within 15 days or taxpayers could face criminal penalties that can escalate to felony charges in some cases.

The $10,000 Threshold
The changes that have taken effect to IRS Section 6050I are controversial for a number of reasons, but the primary causes can be distilled into the following. Put simply, the changes in reporting and compliance requirements take effect for crypto transactions that exceed $10,000 that take place in the course of a trade or business. While reporting requirements and compliance duties have long existed for cash transactions in excess of $10,000, this expansion of 6050I now includes crypto transactions that exceed $10,000 that are part of a trade or business.

What is the definition of a trade of business? Some examples, such as a full-time crypto trader, staker, or miner might be straight-forward examples, but other cases might not be as clear-cut, such as an entrepreneur that receives several large payments in crypto throughout the year for goods or services rendered. Retail investors will most likely not fall under this expanded 6050I scope, but investors would be well advised to review the facts and circumstances of tax situations with qualified tax advisors.

Crypto Specific Issues
The compliance rules and requirements around reporting cash transactions over $10,000 or more have long been understood by investors and tax advisors, but the inclusion of crypto transactions creates additional uncertainty when it comes to tax preparation. One specific anecdotal observation is that while the IRS continues to classify and tax crypto as property, that by including cryptoassets under the expanded Section 6050I requirements the IRS is also saying that crypto transactions require the same reporting as large cash transactions.

Specific issues that might occur during the tax planning and preparation process include items that are unique to the cryptoasset space. For example, if a crypto trade or even an entrepreneur utilizing crypto has a sizeable number of transactions being processed through a decentralized exchange or mixer, has staking income that could constitute a significant part of overall income, or is deemed to generate crypto income on a full-time basis these entrepreneurs could be subject to the reporting requirements.

One question that has been raised multiple times is how taxpayers can properly collect and report the required data is said income is derived from decentralized counterparties? This remains unaddressed as of yet, and will likely take further guidance or legal action to clarify.

No matter how these changes are interpreted or enforced via legal actions, the reality remains that crypto tax compliance has become more complex for investors across the board. Investors, and tax advisors, should be ready for closer scrutiny of records and returns going forward.

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US Crypto Tax