The fairly new crypto reporting tax law that has recently come into effect appears to have massive implications for crypto users. But what it means exactly, and who it may affect, is unclear.
What is the $10k Crypto Reporting Rule (6050I)?
Forming part of the bipartisan infrastructure bill instituted by President Biden back in November 2021, the $10k Crypto Reporting Rule (6050I) is a law that, as of January 1, 2024, requires any business or individual who receives $10,000 or more in crypto, to report the transaction via a specific form to the IRS within 15 days.
The rule also requires individuals to include private and personal details of both the recipient and sender such as names, addresses, identification numbers, the amount paid, the date, and the nature of the transaction. Failure to comply with these requirements could result in individuals or businesses receiving a fine of up to $ 250,000 and up to five years in prison.
These reporting requirements are part of a larger bill (Title 26 Section 6050I) that relates to cash. This law wasn’t written as a new statute, but rather an amendment to an existing part of the US tax code.
This particular existing cash reporting rule became law in 1984, following closely after the Bank Secrecy Act of 1970, one of the first major laws instituted to address money laundering.
These laws passed back in the ’70s and ’80s were to help law enforcement agencies detect and discourage money laundering by creating the need to file documentation, making it easier to track cash transfers and incur penalties if the documentation wasn’t filed.
The above US law has been in effect since, and without any significant changes until now, when just eight words were added to the infrastructure bill section 6050I, essentially expanding the definition of cash to include “any digital asset” and extending the tax code’s reporting requirements to cryptocurrency.
The original bill written in 1984, under Section 6050I of the Internal Revenue Code (IRC), required any individual involved in a trade or business who received over $10,000 in cash from a single transaction (or a series of related transactions) to declare this on form 8300.
Who Does This Reporting Rule Apply to?
There has been little clarification or guidance from the IRS in terms of who exactly is obliged to report on these transactions and this has raised concerns among crypto traders. Particularly about using decentralized finance protocols that do not have a physical address or social security number associated with these protocols or their users.
But tax policy experts advise crypto users to remain calm. Saying that the law will likely only apply to a few and not to the majority of crypto investors or NFT resellers. They also note that the statute is not currently in effect, and speculate that it could be months, perhaps even years away from actual enforcement.
This is most certainly due to the IRS’s ongoing litigation with crypto advocacy non-profit group Coin Center over two major claims: (1) forcing US citizens to collect highly sensitive information about other US citizens and requiring them to report it to the government without a warrant, which is considered unconstitutional under the Fourth Amendment; and (2) demanding that politically active organizations create and report lists of their donors’ names and other private, identifying information to give to the government, which is also unconstitutional under the First Amendment.
In addition, Coin Center is also demanding that the IRS not enforce the law until a lengthy period of public comment and review takes place.
The law primarily applies to crypto users who receive crypto of more than $10,000 in the context of a trade or business transaction. But this is where things get tricky since the term “trade or business” is broadly defined and thereby subject to interpretation.
As a result, the courts and the IRS consider several of the following factors in order to determine what qualifies as a trade or business:
- Regularity and continuity of the activity
- Intent to make a profit
- Level of activity
Retail traders typically aren’t considered a “trade or business” but this could all change depending on if you trade frequently, run validator nodes, engage in staking, etc.
In other words, the IRS is inclined to classify only full-time crypto market participants as traders, which could mean that the majority of crypto users would be exempt from the reporting requirements.
Addressing the $10k Crypto Reporting Rule’s Tax Challenges
The law, if adopted and enforced, could create a whole host of problems for individuals who happen to receive payments from DAOs (Decentralized Autonomous Organizations) like what social security number to put down for the payer. And for crypto stakers, would running a node be considered a business by the IRS, or how you would list a home address for Ethereum, for example?
There is also the question of whether crypto exchanges like Binance and Kraken need to document every transfer exceeding $10,000 that occurs on their platform. But more than likely, these issues are going to be addressed over a lengthy period before the law is ever enforced by the IRS.
In fact, the Treasury Department and the IRS have just recently announced that until some clarification around the newly amended section 6050I of the Infrastructure Act is provided, anyone (engaged in a trade or business) who receives digital assets or digital assets and other cash in one transaction (or two or more related transactions) will not be required to include and report on those digital assets received. However, if the cash portion of any such transaction exceeds $10,000 this will still need to be reported as per the bill in its original form.
Takeaways
As you might have guessed, the $10k Crypto Reporting Rule (6050I) leaves us with many unanswered questions, some of which are listed below.
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- When will a digital asset transaction be considered a “trade or business transaction” as opposed to an investment transaction?
- Will US citizens still be required to fill out form 8300 or will a new form be drawn up?
- How will recipients of digital assets file the required form if they don’t know who the sender is and have no way of obtaining the required information?
- How will airdrops or hard forks be treated if FMV (Fair Market Value) of the received coins or token is over $10,000?
- How will mining and staking rewards be treated?
- How will a form be filed when it comes to decentralized exchange transactions?
Contact a tax professional if you need clarification about the extent of your tax liability, feel overwhelmed, or require technical assistance with your crypto taxes.
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