The U.S. Treasury Department announced on May 20, 2021 a proposal as part of President Biden’s American Families Plan, that would require any cryptocurrency transaction of $10,000 or more to be reported to the Internal Review Service (“IRS”)[1]. The proposed plan would require financial institutions, payment settlement entities, and digital asset exchanges, businesses and custodians to report cryptocurrency transactions of $10,000 or more on all business and personal accounts.
The popularity and demand for virtual currencies continues to rise and along with it governments around the world are facing significant challenges with regulating the market and compliance with reporting taxable income. The Treasury’s proposal is aimed at closing the tax gap, or the difference between the amount of tax owed and the amount of tax actually paid.
According to the report, the new reporting requirements specifically address cryptocurrency and crypto asset exchanges because “[c]cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion...Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade, especially in the presence of a broad-based financial account reporting regime.”[2]
The IRS also has identified cryptocurrency transactions as an enforcement priority and has recently included cryptocurrency reporting on the individual tax return, Form 1040. The proposed increase in information reporting from third parties aims to improve taxpayer compliance. The Treasury’s report explains that taxpayer compliance rates exceed 95% when the IRS receives third-party information reports that can be used to verify income. In contrast, when the IRS cannot use third-party information to verify income, taxpayer compliances rates are less than 50%.[3]
The Treasury’s report estimates that the new reporting requirements will become effective for tax year 2023, giving the IRS and financial institutions time to prepare. The proposed reporting requirements still require U.S. Congress’ approval.
If you or your business needs assistance in navigating cryptocurrency reporting requirements, please contact the experienced banking and transactional attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.
[1] U.S. Department of the Treasury Press Releases (2021, May 20). Treasury Releases Report on the American Families Plan’s Tax Compliance Agenda. Retrieved from: https://home.treasury.gov/news/press-releases/jy0188
[2],3The American Families Plan Tax Compliance Agenda (2021, May 20). Retrieved from: https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf
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