Reporting Cryptocurrency Transactions Over $10,000 to the IRS or Face Jail Time? The crypto taxing situation is complicated

The new tax law seems to have a huge impact on cryptocurrency users, but who it might affect and when doesn’t seem to be that simple.

Crypto taxes can be a headache. Image by Shutterstock

The year 2024 began with a loud cry from all corners of the crypto community: the IRS is coming! The IRS is coming!

The hubbub was sparked by a circulating section of the Federal Infrastructure Act of 2021, which mandates that beginning January 1, 2024, key details related to certain cryptocurrency payments over $10,000 must be reported, including the payer’s name, address, and Social Security number. The U.S. Internal Revenue Service (IRS) or the penalties for filing felony criminal charges against them.

Cryptocurrency users quickly began to panic, unsure if they would suddenly be at risk of jail time for failing to report large on-chain transactions.

But tax and policy experts advised staying calm. They say the law may not apply to most cryptocurrency investors and NFT speculators. In addition, they emphasize that the regulation is not yet in effect and could be months or even years away from actual implementation.

Jason Schwartz, a tax partner and cryptocurrency expert at the law firm Fried Frank, told reporters, “There are some outstanding issues here that have to be resolved, but I don’t think people should really despair because it’s pretty clear that the IRS doesn’t think this all applies at this point. ”  Kaspa mining

This is in reference to a statement made by the IRS during ongoing litigation with cryptocurrency advocacy group Coin Center over the requirement that the agency does not intend to enforce the law until a lengthy period of public comment and review has taken place.

So what exactly does the law require and who does it apply to?

The statute requires anyone who receives at least $10,000 worth of cryptocurrency in the course of “trade or commerce” to report identifying information about the money paid to them. The same law has long been in place for cash transactions.

The law’s potential impact on cryptocurrencies boils down to what constitutes a financial transaction conducted in a “trade or business,” a term in tax law that, while inspired by decades of legal precedent, has no literal definition.

I think it’s clear that it applies to almost any transaction where someone exchanges goods or services for crypto assets worth more than $10,000,” said Miller Whitehouse-Levine, chief executive of the cryptocurrency lobbying organization DeFi Education Fund. ”

But what does this mean in practice?Whitehouse-Levine says that if you’re an artist selling $12,000 in NFTs, then the rule probably does apply. If you are an NFT collector and resell the same NFT for $20,000, then it may not.

What about trading cryptocurrencies?Whitehouse-Levine says it’s not sure. The IRS website defines a trade or business as “…… activities honestly conducted for profit,” which sounds a lot like flipping a Meme coin.

But Jason Schwartz doesn’t agree. He insists that the IRS tends to categorize only professional, full-time cryptocurrency market participants as traders, meaning that the vast majority of cryptocurrency users would be exempt from reporting obligations.

His take: “I would be very surprised if these reporting requirements apply to the typical cryptocurrency user, or even the so-called DeFi degen. They just don’t do this work as a full-time job.”

That doesn’t mean cryptocurrencies are transparent. schwartz argues that this law, if adopted and enforced, could give individuals who receive payments from DAOs (what social security number do you leave for your payers? Do you list a home address for Ether?) , cryptocurrency stakeholders (who are running a node, a business, and how that works creates a myriad of headaches.) , and even cryptocurrency exchanges like Binance and Kraken may have to start logging every transfer over $10,000 on their platforms.

But he’s hopeful that these issues will be resolved, and according to him and other experts, it’s going to be a long time before the IRS enforces the law.

Does the law actually work?

The revised IRS regulations (the same text circulating on Twitter) do specify a January 1, 2024 effective date. But recent legal developments suggest that it could take months or even years for the IRS to actually enforce the law.

This disconnect stems from the crypto lobby group Coin Center, which says the new crypto tax law is unconstitutional and is currently suing the IRS to repeal it. Last month, in a federal appeals court, Justice Department attorneys representing the IRS attempted to dismiss the lawsuit, announcing that the law would not automatically go into effect this year, and that it would not actually be enforced until after a long period of public comment and review.

Whitehouse-Levine of the DeFi Education Fund said the process could take years. The U.S. Internal Revenue Service (IRS ) first proposed a similar proposed rule on cryptocurrencies in January 2022; after two years and three rounds of public comment, it has yet to become official IRS policy.  Bitcoin mining

“Assuming the Department of Justice and the Department of the Treasury aren’t lying to the Federal Circuit, who knows how long it will last,” Whitehouse-Levine said. “They haven’t even begun the process of proposed rules and rulemaking.”

Coin Center insisted this week that the law is already in effect and acknowledged in a blog post that the Justice Department disagrees with that reading.

But Jerry Brito, Coin Center’s executive director, said focusing on whether the law is now technically in effect is missing the point at this point.

Brito told reporters, “It doesn’t make sense to ask whether the law is actually in effect – for example, if the current speed limit is 55 mph and you’re pretty sure there are no cops around, so you go 80 mph, does that legally make practical sense?”

He argues that the threat posed by the IRS’s new tax law exists now, whether the federal agency says it will enforce the regulation today or a year from now.

He continues, “The law is there and you’re violating it, even though you’re almost certain you won’t get caught.”