IRS-Treasury to intensify scrutiny of digital asset sales.
New Reporting Requirements for Digital Asset Brokers
The U.S. Treasury and the IRS have proposed new reporting requirements for digital asset brokers like cryptocurrencies and NFTs in an attempt to crack down on tax cheats and help citizens assess tax dues arising from such asset transactions.
According to the U.S. Treasury, the proposed regulations would require brokers of digital assets to report certain sales and exchanges. This is part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules.
Brokers would be required to report on the sale and exchange of digital assets in 2026 for activities that took place during the prior year.
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In an Aug. 25 press release detailing the new proposed regulations, IRS Commissioner Danny Werfel said that a critical part of the rules is that it fits in with the larger IRS compliance focus on wealthy taxpayers.
We need to make sure digital assets are not used to hide taxable income, and the proposed regulations are designed to provide a clearer line of sight into activities by high-income people as well as others using them, he said.
We want to make sure everyone pays what they owe under the tax laws, and our research and experience demonstrate that third-party reporting improves compliance.
A Barclays analysis released last year estimated that the IRS could be missing out on more than $50 billion annually due to crypto traders not paying their taxes.
The new rules will also help taxpayers in filing their returns, the Treasury stated.
Under current laws, citizens owe tax on gains made on the sale or exchange of digital assets and can deduct losses on such activity. However, for many taxpayers it is difficult and costly to calculate their gains.
The proposal would require that digital asset brokers provide a new Form 1099-DA to help taxpayers determine if they owe taxes, and would help taxpayers avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns.
These regulations align tax reporting on digital assets with tax reporting on other assets, and, as a result, avoid preferential treatment between different types of assets, the treasury stated.
The agency cited figures from the Joint Committee on Taxation (JCT) which estimated that the new rules could raise almost $28 billion in revenues for the government over a decade.
Taxpayers and Crypto Holdings
In addition to digital asset brokers, the proposed regulations would also require those engaged in real estate activity, including brokers, title companies, and mortgage lenders to report the use of digital assets as payment in real estate transactions. The rule will apply to transactions that close on or after Jan. 1, 2025.
The newly proposed regulations come as the IRS has been increasing its focus on digital assets. In recent years, the agency has asked taxpayers filing 1040 forms about their crypto holdings.
At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)? the IRS asked on the form for the 2022 tax year.
The questions had a yes or no option.
The IRS insisted that the question must be answered by all taxpayers, not just those who engaged in a transaction involving digital assets in 2022.
The proposed regulations stem from the Biden administration’s $1 trillion Infrastructure Investment and Jobs Act of 2021, which included a provision aimed at boosting tax reporting requirements of brokers who transact in digital assets.
The Treasury and the IRS are welcoming comments and feedback on the proposed regulations that will be accepted until Oct. 30, 2023. A public hearing has been scheduled for Nov. 7, 2023, with a second hearing on Nov. 8.
Industry Experts React
The new requirement has attracted mixed reactions from industry experts.
If done correctly, these rules could help provide everyday crypto users with the necessary information to accurately comply with tax laws, Blockchain Association CEO Kristin Smith said in an Aug. 25 statement.
However, the rules must be tailored accordingly and not capture ecosystem participants that don’t have a pathway to compliance, she added.
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