How To Figure Out The IRS Reporting Requirements For Cryptocurrencies In 2023?

Here’s everything you need to know about the new crypto exchanges reporting requirements for cryptocurrency transactions in the 2023 tax year.

So, you bought crypto, and life whipped you with a ton of good luck, helping you sell a lot of it over the years for profits. And now, you’ve amassed a ~comfortable~ amount of wealth for your retirement – just through crypto investments.  

Well, all of this sounds great. 

The only catch here? 

IRS 

Also known as ‘new regulations have been introduced, and you might want to re-think your investment strategy.’

No, really. 

And if you’re a crypto exchange platform, things are about to become more complex in terms of reporting and information transparency.

So, let’s take a look at these new rules and extensions to the current reporting regime for Form 1099-B and Form 8300 in detail in the following discussion.

Table of Contents

• Understanding Form 1099-B
• Form 8300: An Overview
• The Rise Of Crypto Regulations
• The ‘IIJA’ Effect
• What’s Changing?
• Crypto Reporting Transparency: A Key Focus
• 2023 1099  Reporting Requirements: Highlights
• What To Expect In 2023: Investor’s Perspective

Understanding Form 1099-B

• Currently, the IRS requires brokers or barter exchanges to file a Form 1099-B for every person to whom they’ve sold securities, commodities, or stocks, for cash. 
• Additionally, it requires exchanges to report cash, stock, or other property received by the investor through a corporation known to the broker. 
• It further requires the broker or barter exchange to file a Form 1099-B for each person who exchanged property or stock or services through the barter exchange.

Form 8300: An Overview

• The general rules for Form 8300 require businesses to report and file with Form 8300 if they receive $10,000 or more in a single transaction.  
• The information reported on this form helps the IRS and the FinCEN (Financial Crimes Enforcement Network) to track businesses and trade exchanges that are misusing the financial ecosystem for money laundering, drug trafficking, tax evasion, terrorism financing, and other illegal activities. 
• Reporting such cash payments will further enable the federal authorities to keep a check on non-compliant trading entities and businesses that may indulge in “laundering” the money gained through illegitimate sources. 

As you may have observed by now, the authorities at IRS and FinCEN have found some kind of connection between cryptocurrency exchanges and high-value transactions that are going unreported due to the current reporting regime. 

The Rise Of Crypto Regulations

As attractive and full of potential as crypto might seem, it comes with a lot of risks. The cryptocurrency market is still volatile, and inexperienced investors must brace themselves for a rollercoaster of emotions. 

Many crypto enthusiasts even went “all-out” and lost all their hard-earned money due to irregularities and inconsistencies within the crypto market. 

Now, look at this “race for the million dollars” from a regulatory perspective. 

Most people in the country are unaware of the risks yet are willing to invest thousands of dollars on a contingent digital asset. 

The hype around the “quick profits” is hard to ignore. 

At the same time, the risk is too high and there is no way to track who is the ultimate beneficiary. This is due to the “private” and “secure” technology used for transactions. 

• Given these conditions, money launderers are easily able to send millions of dollars to offshore digital accounts and digital wallets without getting caught.  
• An extreme hype like this could potentially collapse the financial ecosystem of a country, and the federal authorities are not going to sit around and wait until that happens. 
• Unreported gains from crypto assets could further widen the tax gap, which could be more “taxing” for taxpayers (you!) in the long run.

The ‘IIJA’ Effect

Considering the above risks and the volatility of the crypto markets, the federal authorities have decided to regulate the crypto market with some measures. One of the many such measures is accelerating ‘reporting transparency’. 

Now, introducing such a measure out of nowhere would not be well-received by the taxpayers. One of the most persuasive reasons for investing in crypto is its very unregulated ecosystem; meaning – the incomes cannot be tapped for taxes. 

However, this changed very quickly when the IRS stated that cryptocurrencies or digital assets will be treated like any other asset or property. This was followed by a series of regulatory reforms specified in the Infrastructure Investment And Jobs Act of Nov. 15, 2021 (now enacted), aiming to control and regulate the highly unstable crypto market.

What’s Changing For Crypto Exchanges From 2023?

While all the above measures seem great and would solve some deep-rooted problems for taxpayers (and the economy), here’s how they REALLY affect your (a crypto exchange) 1099 reporting regime. 

• The reporting requirements are in extension of the current regime and do not explicitly cancel out the old regime.
• The new rules will apply to all crypto exchanges, crypto brokers, investors, and crypto platforms, starting Jan 2023. 
• The new reporting requirements ask the crypto exchanges to treat crypto or digital assets like “cash”, essentially aiming to improve the accuracy of reports.
• Crypto exchanges would need to report crypto brokerage services and sales on Form 1099-B. 
• A copy of Form 1099-B detailing the specifications of the transactions must be sent to the investor and the IRS. 
• When crypto exchanges sell crypto with a gross value of $10,000 or more, then the same must be reported on Form 8300 (when the payments are received). 
• The transaction details of every crypto transaction must be recorded and reported. This is similar to what was done for reporting securities, stocks, and commodities. 
• Crypto exchanges must incorporate a KYC procedure to identify their customers and obtain the taxpayer identification number (TIN) or its equivalent (social security number or EIN) prior to onboarding the profiles. Verify payee TINs in bulk in less than a minute with Tax1099’s real-time TIN Matching system. 
• Both Form 1099-B and Form 8300 must clearly identify the payee with their TIN in correspondence with the transaction. 

Change is bound to be a little uncomfortable. 

However, adapting to these changes is the key. 

With smart tax compliance solutions offered by Tax1099, adapting to such unexpected changes can be a tad bit easier. 

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Crypto Reporting Transparency: A Key Focus

The Infrastructure Investment and Jobs Act of 2021 (IIJA) of November. 15, 2021, instructs crypto brokers and exchanges to report all cryptocurrency transactions.  This instruction will extend to cryptocurrencies and NFTs in addition to stocks and securities. 

Now, let’s say that instead of stocks and securities, you purchased Bitcoin or Dogecoin. The IRS would require your broker to report the cryptocurrencies, the value of those cryptocurrencies, the amount transacted, and other relevant information on Form 1099-B. 

And if you choose to sell your digital assets, then Form 8300 would require your broker to report the sale proceeds (if in excess of $10,000) and other relevant information.

What’s essentially happening here is that the IRS wants crypto enthusiasts and exchanges alike to be more transparent in their reporting approach and not hide the gains made through such transactions. 

The Voluntary Compliance Program of the IRS aims to regulate the current reporting ecosystem in the U.S. and remove the “privacy” of trade that the crypto market enjoys. 

More transparency = More accuracy of tax reports.

These instructions extend along with the current instructions for Form 1099-B and Form 8300, reiterating the key focus on information transparency in reporting.

However, the IRS is giving time to taxpayers to adjust to the new regime without disrupting the reportable transactions until December 31, 2022. Hence, the extended instructions will be effective from January 1, 2023.

What To Expect In 2023: Investor’s Perspective

• Starting from January 1, 2023, investors should expect a Form W-9 from their crypto exchanges or brokers (if it hasn’t been sent to you already). 
• Provide the correct TIN and legal name information in the form and allow the broker or the crypto exchange to verify the details for accuracy. Use Tax1099’s TIN Verification System to verify TINs/legal name combinations in real-time before sending the W-9 form to your broker. 
• Report any gains made on crypto assets on your personal income tax returns. This information must be consistent with the reports submitted to the IRS by the crypto platform. 
• Expect a copy of Form 1099-B and Form 8300 from the crypto exchange and use the details to cross-verify your income information. 
• If you do not receive copies of the forms from the crypto platform, get in touch with your broker or the crypto platform and ask for the copies. Remember, documenting these forms will help you be consistent and accurate with your reports and correct any information that was reported incorrectly.

2023 1099 Reporting Requirements For Crypto Exchanges: Quick Bites

• A separate set of instructions are issued to crypto exchanges and crypto brokers in extension with the current reporting requirements for Form 1099-B and Form 8300. 
• Crypto exchanges are required to report all crypto transactions on Form 1099-B, specifying the payee TIN and legal name. 
• Cryptocurrencies are treated as “cash”. 
• The new rules are upheld for crypto and certain NFTs that use blockchain technology. 
• Reporting accuracy and transparency will take center stage for cryptocurrency exchanges and platforms in 2023.
• Single transactions, pertaining to crypto, amounting to $10,000 or more must be reported on Form 8300. 
• Both investors and crypto exchanges must brace themselves for a slightly confusing yet optimized approach to reporting crypto-related transactions on IRS returns. 

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