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Recipients of Digital Assets Must Report Senders' Identity to IRS Starting in 2024, or Face Penalties or Criminal Charges

Ruth Singleton
Published Date:
Jul 7, 2022


A little-known provision of the infrastructure law passed last November will, starting in 2024, require certain taxpayers who receive more than $10,000 in digital assets a year to reveal to the IRS the senders’ identity, Accounting Today reported

The bill’s provision, Sec. 80603, “Information reporting for brokers and digital assets,” is an amendment to Section 6050I of the Internal Revenue CodeAccording to a paper by Abraham Sutherland, a lecturer at the University of Virginia School of Law, the provision “relies on a 1984 law that was written to discourage in-person cash transfers and to encourage the use of financial institutions for large transactions. The law’s relative clarity and limited applicability in the case of old-fashioned cash is difficult to apply to the transfer of digital assets, thus making compliance unduly burdensome.”

Under the provision, recipients of digital assets will be required to  report the sender’s name, address and Social Security number within 15 days. Civil penalties for those who accidentally overlook the requirement can reach as high as $3 million. And recipients  who intentionally disregard it can be charged with a felony and face up to five years in prison and higher civil penalties. Corporate violators face fines of up to $100,000 per transaction 

Accounting Today noted that some wealth advisers appear to be unaware of the requirement and its potential impact on clients. Similarly, many entrepreneurs who own small businesses that take payment in bitcoin, ethereum or other digital currencies, or who trade crypto assets frequently, do not know about the provision. 

Further, according to Ric Edelman, the founder of the Digital Assets Council of Financial Professionals, an educational and advocacy group, the law doesn’t clearly define what it means to “receive” digital assets. 

There are several reasons behind the new provision. The federal government is  losing more than $50 billion a year from crypto traders not paying taxes on gains, according to a Barclays estimate in May. Cryptocurrencies can also be used for tax fraud and other criminal activities like money laundering, drug trafficking and ransomware. The IRS Criminal Investigation Department recovered $3.5 billion of digital currencies during its most recent fiscal year, which ended last September, a figure accounting for 93 percent of all moneys seized for 2021.  

The new requirement will cover taxpayers who receive digital assets “through a trade or business,” a concept that the Internal Revenue Code refers to frequently but doesn’t define. 

In his paper, Sutherland wrote that “digital assets will trigger the statute in ways that have no analogy in physical cash, because simply using digital assets can meet the 'trade or business' requirement. Trading, lending, and other activity typically connected to digital assets can be ‘trade or business’ activity. Those who help maintain cryptocurrency networks by mining or staking, for example, could qualify. Plus, ... digital assets aren’t limited to ‘virtual currencies’ that substitute for dollars. If your gain-seeking activity involves any such form of digital value, your receipts might trigger the statute.” Writing in September 2021, before the bill was passed, Sutherland argued against the provision's inclusion, warning that it “aims to freeze the evolution of financial technology around existing institutions that serve the government’s interests in surveillance, with no investigation of the law’s costs and consequences and virtually no elaboration of its benefits other than the assertion of increased tax revenues an assertion made to justify the law’s inclusion in a spending bill.” 

Accounting Today reported that another provision in the infrastructure law treats brokerages such as Fidelity Investments, Vanguard and Robinhood as “brokers” that transfer digital assets to investors. Starting in 2023, it will require them to send to customers and the IRS an annual form detailing a client’s digital transactions for federal tax returns that will be filed in 2024.  

Critics argue that many investors will receive inaccurate forms  because crypto exchanges don’t typically track the original price at which a customer buys a digital asset. Bloomberg reported that Treasury officials may delay its start date. 

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