Crypto Tax: Do I Need To Report Tax On Cryptocurrency?
Do I Need to Report Tax on Cryptocurrency?
In recent years there has been a clear global focus on creating clear regulatory guidance for taxes on crypto assets and cryptocurrency tax, with the hopes that it would ultimately result in improving the consistency, transparency and compliance of crypto tax reporting. This means that yes, taxpayers now need to report cryptocurrency taxes on their tax returns but only when a taxable event occurs.
In 2021 the IRS placed the cryptocurrency tax reporting question on the Form 1040 asking “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
This question means that taxpayers can no longer claim they were unaware that they were supposed to report tax on crypto. By checking the yes box for the 1040 crypto tax question, the IRS will look to see if you also filed an IRS 8949 form.
If you fail to file an 8949 form, your account could be audited by the Internal Revenue Service (IRS). Failure to report crypto currency tax activity, may be considered tax evasion or fraud and may result in the account holder incurring interest, penalties, or even criminal charges.
Expansion of Crypto Tax Reporting
Since 2020 the IRS and Organisation for Economic Co-operation and Development (OECD) have been on a parallel course with regard to releasing final regulations for reporting crypto taxes. Both the OECD and IRS are expected to publish crypto information reporting changes in 2022.
These crypto tax changes will increase the calculation and taxation of transactions in crypto and digital assets. They will take on different approaches to reporting, but ultimately they will expose taxpayers to the taxing authority thus identifying the taxpayer.
Although both regulators have committed to publishing cryptocurrency tax rules in 2022, neither has been clear on when the regulations are effective. If the regulators allow for system development time the hope is that the reporting will begin with 2023 transactions but/however we cannot rule out 2022 reporting obligations.
OECD Crypto Tax Reporting Under Common Reporting Standards
In 2020 the OECD released the Secretary General Tax Report to G20 Finance Ministers and Central Bank Governers that focussed on strengthening the legal and regulatory crypto tax framework. Following this in 2021, the OECD announced at the CFE’s 2021 Forum, that there will be an expansion of the crypto reporting obligations under the Common Reporting Standards (CRS).
On March 22 2022, the OECD published a public consultation document on Cryptoassets Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS). The CARF draft regulations will provide guidance for the automatic exchange of tax information on transactions in cryptoassets.
The proposal covers the addition of new entities required to execute reporting based upon the expanded identification of intermediaries. It also covers the types of activity and balances that will be required for inclusion as part of the Automatic Exchange of Information (AEoI).
New protocol provides new rules for certification and cross border reporting. Based upon the proposal under CARF any institution that fits the definition of an intermediary and holds, trades, exchanges or transfers Crypto Assets will need to modify its processes and policies to collect Self Certification documents from all crypto traders and asset holders.
Intermediaries that already manage customers that provide CRS Self-Certification may need to have separate procedure for cryptoassets. Solicitation of forms based solely upon the elapse time of 36 months would be new and unique to the CARF.
Reporting Crypto Taxes Under Foreign Account Tax Compliance Act
In August 2021 the US Senate passed the Infrastructure Investment and Jobs Act (“Infrastructure Bill”). The Infrastructure Bill” was signed into law by President Biden on 15 November, This bill carries expanded broker tax reporting provisions, which cover Cryptoassets and Digital assets. This bill signified a US regulatory shift in taxes on crypto.
On March 28, the US Treasury published its "Green Book.The IRS is anticipated to publish rules for information reporting in line with the legislation from the Infrastructure Bill. The proposal would bring foreign holders of cryptocurrency and digital assets into the scope of Foreign Account Tax Compliance Act tax reporting.
The means by which these foreign persons would be captured for crypto tax reporting is by making holders of cryptoassets subject to the FATCA certification and documentation.
FATCA rules originally removed Gross Proceeds from the withholdable and reportable payments. The proposal would reintroduce Gross Proceeds into the list of payments covered under the FATCA requirements. This would propose that accounts previously not covered under FATCA because they did not have covered transactions would now need to be documented. This list of proceeds would include cryptocurrency and digital assets.
Regulatory Compliance Impact For Reporting Crypto Taxes
The proposed crypto tax reporting regulations brings more entities, including crypto exchanges and crypto trading platforms, into scope for executing tax reporting. Additionally, accounts that were out of scope or not deemed to be a specified financial account may now come into the documentation and reporting requirements for FATCA and CRS.
The first step is to do some due diligence on your accounts. Confirm you have good presumption rules where documentation is not present. Collection of documentation will be required to ensure that reporting is done under the correct reporting regime. Documentation will identify which reporting requirements the account falls under and if there are any exemptions to the reporting.
With the growing number of Crypto accounts or wallet holders, automated compliance processes are key to ensuring compliance with the FATCA and CRS requirements. Finally, ongoing monitoring for change is going to be crucial to ensuring that FATCA and CRS self-certification forms received remain valid. The regulatory framework will only grow from this point and having systems that adapt and are easy to update are key.
How can TAINA Help with Crypto Tax Compliance?
At TAINA we continue to monitor the crypto and digital asset regulatory landscape and will track the OECD and IRS published regulations with an expectation that the actual initial reporting year will not be 2023. We believe that reporting tax on cryptocurrency and regulatory compliance doesn’t need to become a blocker to user growth or affect your user experience.
By using TAINA’s fully-automated FATCA and CRS Validation Platform you can continue to focus on growing your business whilst we take care of your crypto currency tax compliance.
TAINA’s flexible and lightweight platform has helped financial institutions of all types improve efficiency, reduce cost, mitigate risk and improve their overall customer experience whilst ensuring that they have more accurate, complete, and clean year-end data for FATCA and CRS reporting to tax authorities.
We would love to talk to you more about your compliance and reporting processes for cryptocurrency taxes and how our award-winning FATCA and CRS Validation platform may help you deal with reporting tax on crypto under the FATCA and CRS regimes.