Uncle Sam to Taxpayers: Show Me the Receipts (For Certain Digital Assets)

On Jan. 16, the Internal Revenue Service (IRS) released Announcement 2024-4 (the announcement) in which it stated that digital assets are not required to be included in determining a taxpayer’s reporting obligations under Section 6050I of the Internal Revenue Code of 1986, as amended (the code) until the promulgation of implementing regulations. The Infrastructure Investment and Jobs Act (the Infrastructure Act), passed on Nov. 15, 2021, expanded the scope of current reporting requirements under Code Section 6050I. 

Under the revised statute for transactions after Dec. 31, 2023, subject to certain exceptions, taxpayers must report to the IRS the receipt of more than $10,000 of digital assets in the course of a trade or business. Prior to the announcement, it was unclear whether the statute as it pertains to digital assets was self-executing such that taxpayers would need to comply with the reporting transaction in the absence of IRS guidance. 

The announcement confirms that the Treasury Department (the department) and the IRS will publish treasury regulations that interpret the new rules and will provide forms and instructions for reporting digital assets under Code Section 6050I(a), discussed below. 

Until the Treasury regulations are published, digital assets are not subject to the new reporting requirements. Notwithstanding the deferred implementation of Code Section 6050I reporting for digital assets, businesses and individuals who receive cryptocurrencies and other digital assets in their trade or business should begin to familiarize themselves with the new reporting requirements, particularly since the failure to comply can result in civil and, in some cases involving willful failures, criminal penalties.

Code Section 6050I(a) already required taxpayers engaged in a trade or business who, in the course of providing services, “receive[s] more than $10,000 in cash in one transaction (or two or more related transactions)” (covered cash transactions) to file a return prescribed under the treasury regulations, subject to certain exceptions. The current treasury regulations require reporting of single receipt of cash in excess of $10,000 received from a principal. In certain cases, payments made within a 12-month period that aggregate to more than $10,000 are subject to the reporting requirement. 

Reportable transactions include, but are not limited to, sales of goods, services, real property and intangible property; rentals of real or personal property; exchanges of cash; contributions to a custodial trust, or escrow arrangement; payments of a preexisting debt; conversions of cash to a negotiable instrument; expense reimbursements; and the making or repayment of a loan. Taxpayers will not be permitted to divide transactions into amounts below the threshold solely to avoid reporting under Section 6050I of the code.

The Infrastructure Act has expanded the reporting requirements to include digital assets. Prior to Jan. 1, cash included U.S. currency, foreign currency and, under certain circumstances, certain bearer instruments such as cashier’s checks, bank drafts, traveler’s checks and money orders. The Infrastructure Act expanded the definition of cash to include "any digital asset” for reports required to be filed after Dec. 31, 2023. The code defines “digital asset” to mean “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.” The definition does not expressly use the word “cryptocurrency,” but it is generally understood that digital assets includes cryptocurrency. It remains to be seen whether the IRS will take a position that the definition is broader than cryptocurrency. 

Treasury regulations under Code Section 6050I require a taxpayer to report covered cash transactions using Form 8300, which has been used for reporting transactions to the Financial Crimes Enforcement Network (FinCEN) under 31 U.S.C. § 5331. Form 8300 typically includes information about the recipient and the amount received, as well as information on the person from whom funds were received, including but not limited to, name, address, date of birth, taxpayer identification number and identifying documentation. 

The treasury regulations state the form should be filed within 15 days of the date of the transaction. Any person required to file a Form 8300 also may be required to provide each party named on such Form 8300 with a written statement including the reporting person’s name, address, contact person, phone number and aggregate amount of reportable cash. The statement must also affirm that the information was reported to the IRS and must be provided to the individual named on Form 8300 by Jan. 31 of the year following the reportable transaction. The current version of Form 8300 does not include a reference to digital assets or cryptocurrencies. However, the IRS has stated that it will provide forms and instructions for Code Section 6050I reporting that address the inclusion of digital assets.

Intentional or willful failure to file a timely Form 8300 could lead to civil penalties from $25,000 to $100,000 and may be considered a felony punishable by up to five years of imprisonment and a criminal penalty of up to $250,000 ($500,000 for corporations). Other penalties may apply for noncompliance with Section 6050I of the code or the parallel provisions under tile 31 of the United States Code, such as attempts to structure transactions in a manner intended to avoid the reporting requirement or the negligent failure to file. 

The new requirements raise practical questions that currently remain unresolved. The new reporting requirements could pose problems for cryptocurrency exchanges and similar platforms. Cryptocurrency exchanges and platforms likely will need to make sure that the customer information they collect includes the information required under Code Section 6050I. Such information includes customers’ taxpayer identification numbers, addresses, etc. which will likely lead to customers being required to provide a Form W-9 or applicable Form W-8. 

Cryptocurrency exchanges and platforms will also need to begin tracking the holding period and buy/sell prices of the digital assets in customer accounts. It is likely that some exchanges and platforms will not presently have all required information, making compliance with the reporting requirements difficult.

In addition, it is unclear which standard should be used to value digital assets to determine whether a transaction or series of related transactions is equivalent to more than $10,000. The IRS has released frequently asked questions that provide guidance on valuing cryptocurrency for purposes of determining gain from recognition transactions, but it is not entirely clear how or to what extent these would apply in the context of Code Section 6050I. Further, guidance regarding how to complete Form 8300 when using it to report digital asset transactions rather than traditional cash transactions is currently lacking.

Finally, it is not clear whether FinCEN has authority to receive Form 8300 for transactions involving cryptocurrency, because, while Section 6050I of the Code was amended to add digital assets to the definition of cash, similar amendments were not made to 31 U.S.C. § 5331, the statute requiring reporting to FinCEN. Wrapped into this issue is the question of how far regulators will stretch the definition of digital assets.

Brown Rudnick will continue to monitor guidance related to Section 6050I and will provide further updates as such guidance is disseminated. In the meantime, we would be pleased to assist you in your analysis of these reporting requirements.