The meltdown in cryptocurrency markets couldn’t seem worse for clients invested in digital assets. But for some, it is.
A lesser-noticed provision in a $1 trillion law passed last November requires certain taxpayers who receive more than $10,000 in digital assets a year to tell the Internal Revenue Service who sent them.
Starting in 2024, recipients must report the sender’s name, address and Social Security number within 15 days. Civil penalties for those who accidentally overlook the requirement can hit $3 million. Those who intentionally disregard the requirement 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.
Not just wealth advisors appear unaware of the requirement and its potential impact on clients. Neither do many entrepreneurs who own small businesses that take payment in bitcoin, ethereum or other digital currencies, or who trade crypto assets frequently.
Ric Edelman, the founder of the Digital Assets Council of Financial Professionals, an educational and advocacy group, said the new law created concern for “anyone involved with the transfer of digital assets.” One problem, he added: The law doesn’t clearly define what it means to “receive” digital assets.
"It's probably the only asset class where maybe the client knows more than the advisor right now," Maxwell Lane, head of product for Flourish, said at Financial Planning's Invest conference.
Bitcoin has lost roughly two-thirds of its value since a record high of nearly $69,000 last November, its worst time since 2011. Two stable coins pegged to the U.S. dollar, TerraUSD and luna, collapsed in May. Last month, a hedge fund invested in cryptocurrencies, Three Arrows Capital, bellied up. Some exchanges have halted trading and withdrawals.
Digital frost aside, some investors have made fortunes. But winners or losers, they now have to tell the IRS.
Why advisors should care
The new reporting requirement comes as bitcoin and other digital currencies appear to gain more usage. One in five Americans has invested in, traded or used cryptocurrency as a form of payment,
The IRS is worried that cryptocurrencies can be used for tax fraud and other criminal activities like money laundering, drug trafficking and ransomware. Federal coffers are losing more than $50 billion a year from crypto traders not paying taxes on gains,
The reporting requirement covers people who receive crypto through a trade or business, a concept the Internal Revenue Code refers to frequently but doesn’t define.
While its explication includes many day traders and business owners who accept crypto as payment for goods or service, it excludes ordinary investors. Still, the requirement may sweep in a much broader swathe of people.
“Simply using digital assets can meet the ‘trade or business’ requirement,’”
The disclosure obligation is in addition to another requirement in the new law, a package of outlays for bridges, roads and power lines known as the Infrastructure Investment and Jobs Act. The 1,039-page
That rule has prompted criticism 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
The other requirement governing recipients, not senders, expands a long-standing rule on the disclosure of cash transactions. The new requirement for digital assets, including non-fungible tokens, effectively treats cryptocurrencies like cash — even though the IRS considers crypto to be taxable property like a stock or bond.
The rule covers people who are “engaged in a trade or business.” The IRS is fuzzy on that concept, which it
Sutherland wrote that the new reporting requirement “demands the impossible” of taxpayers. “Digital assets might not be ‘received’ from a person whose personally identifiable information can be verified and reported.”