Tax Section Odyssey Digital asset playbook: Part 3 — Reporting requirements
Steve Turanchik from the AICPA’s Digital Assets Tax Task Force discusses upcoming reporting requirements for digital assets. Sec. 6045 will require brokers to report transactions involving digital assets, similar to how they report securities transactions currently. This is meant to combat anonymity concerns and improve tax compliance. However, the reporting rules have been delayed multiple times. The AICPA continues advocacy efforts in this area, providing comments to highlight issues and gaps in reporting requirements.
AICPA resources
- Digital assets and virtual currency tax guidance and resources — This hub is your go-to library for AICPA guidance and resources as well as current legislation, IRS initiatives and tax advocacy projects.
. Advocacy
· AICPA comments on virtual currency reporting under Sec. 6045 and Sec. 6050I, Form 8300 and instructions, Oct. 28, 2022
Other resources
- IRS Digital Asset page — Recently redesigned page to provide the latest IRS information on digital assets
- Treasury and IRS announce that businesses do not have to report certain transactions involving digital assets until regulations are issued, Jan. 16, 2024
Transcript
April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section.
I'm here today with Steve Turanchik. He's an attorney with Paul Hastings in their tax, litigation, and controversy practice. He's also a member of the AICPA's Digital Assets Tax Task Force. That is a mouthful.
We are wrapping up this three-part series, I hope you've been listening, but you can always go back and listen to the first two parts, on digital assets here on the Tax Section Odyssey. It's been a wild and fun ride.
In today's episode, we're going to focus on reporting for digital assets. We're going to be talking about when that's scheduled to happen, what it will mean, what it will not mean, when it will actually happen as far as we know, at least at this moment, and what you need to do to help businesses and individuals that you work with in this space.
Steve, always, especially with this topic, I like to start off at a foundational level. I'm still learning terminology in this world and I bet our listeners are also, but talk to me about what we need to know about Sec. 6045 and 6050I. What are the key things that we need to be paying attention to?
Steve Turanchik: I'm happy to address it. Let me say, information reporting is rarely a fun topic. But for our members, it's going to be incredibly important because as information is reported to the IRS and to their clients, the practitioners are going to need to decide how they handle that information that's reported. You've got to account for it someplace. If you don't, the IRS sends you notices asking — hey, where is this information?
Let's step back prior to these code sections dealing with digital assets. We'll just talk about them generally.
[Sec.] 6045 is in the code because it requires brokers — that is the JPMorgans, the Schwabs of the world — to report when their customers have transactions involving securities. If you have an account at JPMorgan and you sell a security during the course of the year, JPMorgan will report that to you and the IRS on a Form 1099-B that is dealing with the reporting of securities.
There was a bit of a hullabaloo when that first came into play so far as information reporting to making sure basis was reported. This was one of the tools in Congress's toolbox to get people who are dealing in digital assets to report those transactions dealing in digital assets. Remember the big concern about this. When you go back to Bitcoin and the Blockchain and the various types of protocols that exist in the world, the concern from the government's perspective, including the IRS, is that these transactions were taking place anonymously. There was no real way to go about tracking these transactions.
Congress, in its infinite wisdom, has put into place an amendment to [Sec.] 6045 that requires people who are dealing in transactions on the Blockchain to report those transactions to the IRS. We're going to get into what hazards are going to come along with that and the various snafus that we are invariably going to see in a few minutes, but the basis of [Sec.] 6045 reporting was the brokerage reporting. That is, your JPMorgan and Schwabs reporting securities transactions to the IRS to assure that people who had money or had assets on those exchanges would report them to the IRS.
Now let's turn to [Sec.] 6050I. [Sec.] 6050I is historically been used to report transactions in cash. That is, greenbacks. If an individual or business comes into an art dealership or an automobile dealership and they bring in more than $10,000 in one transaction or a series of transactions, that trade or business was required to report those transactions to the IRS on a Form 8300 within 15 days of receipt of that cash. For those businesses that dealt heavily in cash, it just became a relatively standard way to go about reporting those transactions. Like it or not, if you're dealing in cash, you're receiving cash and you fail to report those, the penalties can be pretty severe.
With that in mind, that's where these two sections come from. Under the new legal requirement, if any person who in the course of their trade or business, it is important to note that it is part of your trade or business, receives more than $10,000 in digital assets in a single transaction or series of transactions, that needs to be reported to the IRS within 15 days. It's not limited to whether it's a taxable transaction. If a borrower is repaying a loan in digital assets, that needs to be reported. If funds are being raised in a capital raise, a venture capital firm, or an investment fund, if they're receiving digital assets as part of an investment, that also needs to be reported to the IRS. The penalties for failing to report that get to be pretty severe.
I understand the policy reason for it is that the IRS wants to see more and more reporting about a part of the economy that they believe is anonymous, that it's running under the radar. [Sec.] 6050I was put in place really to combat two different things.
First was tax evasion. If you're dealing in cash, it's hard to track. But the other part of it was money laundering. That certainly remains a concern here, which is why the IRS and frankly Treasury wants to root out potential money laundering by requiring those transactions to be reported. The reporting requirement involves obtaining the name, the social security number or tax identification number of the transferor.
From a policy perspective, I get why they're trying to do that. One thing that I've seen for frankly clients of mine, a question that routinely comes up, and I know for practitioners these are not the clients they want — but they exist out there — is, hey, Steve, I understand this requirement to report the received digital assets within 15 days, is that only for US businesses? If I locate my operation to the Caymans or Malta, do these rules apply to me? The short answer is the IRS could try, but enforcement is going to be very difficult.
You see a light bulb go off in the guys who are in this area. They're like, guess what? I'm going to start a foundation in Malta and forget the United States, which is discouraging if we want to see this infrastructure develop here in the US.
But for our practitioners, for our members, when this reporting comes in, there's going to be a deluge of information for the IRS. There will be every incentive for recipients of digital assets to be careful. That is, more conservative and over-report.
If your clients are the ones providing digital assets, they are going to need to deal with the fact that the information is reported to the IRS and be able to explain why it wasn't a taxable transaction or if it was a taxable transaction, that they'll need to report it. Remember if the person has, let's say $1,000 basis in Bitcoin and Bitcoin is now at $10,000. When they transfer that in exchange for goods or services, that itself is a taxable event for the transferor. [If it is an] event for the transferee, it depends upon the nature of the transaction.
[Sec.] 6045 is, at least in its initial drafting, was extremely broad. [Sec.] 6045 requires any person who for consideration is responsible for regularly providing any service, effectuating transfers of digital assets on behalf of other person. When we first read that as practitioners, we said that's going to encompass a lot of people that have no ability to comply. It's not just wanted to be exchanges or financial institutions. It could be anyone who develops software, anyone who is validating blocks on a Blockchain.
The good news is that, at least in the proposed regulations this past fall, the IRS has said, we don't intend this to apply to validators. We don't intend for it to apply to miners, or for people who have no ability to comply. Rather the requirement to the extent we're looking at one is for custodians to report this.
Now, what's troubling about this is you're going to have reports of transactions that may not be taxable. If the assets are moving from my account at custodian A to my account at custodian B, that's not a taxable transaction. The problem, of course, is because of the anonymity of the Blockchain, the brokers are not going to know whether it's a taxable transaction. You as the practitioner, are going to need to root out with your clients whether or not it's a taxable transaction for them.
The sad reality is that many account holders and many clients don't keep the best of records and trying to get those records off the Blockchain while doable is going to be labor intensive. That is the landscape we're looking at on a going forward basis.
Walker: That's a lot to unpack there. I was just thinking about as you were talking, I was in practice and I remember when the basis started having to be reported on the 1099-B and all the concern it caused with all the different codes and things. Now that's just old hat and it just happens. It seems like a whole different ball of wax for digital assets.
But spoiler alert, these reporting requirements have been started, [saying] they're going to be in place now and then they've been pushed back. Let's talk about where we stand now with the timing of their reporting requirements. I say where we stand now because I feel like we've just continued to push back because maybe the IRS isn't quite ready to deal with all the questions, but where are we right this minute?
Turanchik: April, the short answer is, we are in limbo.
Walker: That's not a fun place to be in the tax world, but here we are.
Turanchik: It is not. We were expecting rules to become effective January 1 of 2024. That is this past year. The reality is on the [Sec.] 6045 broker reporting, those rules will not become effective until the regulations are finalized. Proposed regs were issued last fall. They took comments last summer, they took comments through the fall. It's not entirely clear when the [Sec.] 6045 regulations will be finalized, in part because the IRS has received more than 30,000 comment letters.
Now, the backstory behind that and it's a little nefarious. A lot of those comment letters were likely AI or chatGPT generated, but they weren't generated by folks like the ABA or the AICPA. We did provide comment letters. The vast majority of them were created by artificial intelligence and explicitly meant or intended to slow down the IRS's rulemaking procedures.
It is my understanding from talking with folks who are working on the final regulations that they will have a way in which to sift out the more bogus comments. The reality is as part of the Administrative Procedures Act, the IRS needs to issue the regs, issue the notice, receive comments and take those comments into play. If the IRS disregards the comments entirely and it's likely the regulations is invalid and that of course, throws everything in a haywire.
With all that said, my contacts at Treasury estimate…they expect to have final regulations the summer of 2024. That might be a little ambitious because even if you throw out the bogus comments, there are still really substantive commentary from serious groups explaining — here all the areas that we think you guys need to provide guidance in and because it is a brand new area.
We see potential for reporting transactions that are not taxable and for potentially double reporting. Because remember the standard for the brokers is, any person who regularly provide any service effectuating transfers. You can have more than one person providing the service of effectuating or a transfer from place A to place B. If let's say three or four parties report the same transaction and that assumes it is even a taxable transaction. You now have a potential gain that's four times what should be reported to the taxpayer. That is a recipe for chaos. That's assuming that you have a taxpayer with good records whose straightforward with their return preparer about here are all forms I got. By the way, the same transactions reported twice, three times, four times. You're the return preparer. What do you do with that? You report it four times and then back it out as duplicative. Maybe. I think you probably have to.
But when I say it's a recipe for chaos, I'm not kidding about that. Let's imagine you're the IRS examiner and you're either newly trained, let's say you're well experienced in this area. You see the transaction shows up four times on a 1099-B or 1099-DA, which stands for digital assets. Are you going to take the return preparers word for it? That's a dupe. For all you know, you had four transfers of Bitcoin on that day and all of them are taxable. When you pull the Blockchain out and give it to the examiner who can't understand the Blockchain. Just think about that in the course of an audit. Is the examiner going to understand the Blockchain you give to them and even if they do, are they going to trust you?
Walker: Potential for, like you said, chaos, yeah.
Turanchik: If I had to guess, it is a wild guess, I would suggest we're going to see reporting on the brokers for transactions beginning January 1 of 2026. That's my current best guess. The problem is, let's say the regs come out final this summer. If you make it January 1, 2025, the people who are required to report are not going to have the infrastructure in place. Some might, the established exchanges might, but everyone who's going to be required to comply will not have that capability.
Walker: [Sec.] 6050I, I was going to say, with a little bit of the same story but a little different.
Turanchik: Little different, because there, there are no proposed regs and under the statute that was to become effective in the express language of the statute was January 1, 2024. That is just at this point two months ago. No proposed regs, nothing from the IRS saying we're delaying this. It wasn't until mid January that the IRS said, without implementing regulations, this cannot be effective despite the express language of the statute.
One area that gave me as a practitioner some comfort and I say some comfort, is that there's a lawsuit pending against the enactment of these particular provisions claiming violations of privacy, Fourth Amendment rights and in a brief to the District Court, the Department of Justice said [Sec.] 6050I will not become effective until final implemented regs are promulgated. It gave me some comfort, but just some comfort. Can I really use litigating position from the Department of Justice to justify my clients failure to file the Form 8300, despite the express language of the statute? As a lawyer, that gives me the heebie-jeebies.
Walker: Technical term, right? January is the time when people are trying to gather and get their reporting together. The fact that it wasn't delayed until the middle of January, there was this new form that was maybe going to be out there and then anyway, so like you said, some comfort that, okay, it's going to be delayed until we hear more from the regulations.
Turanchik:When the regulations are finalized. Regulations have not even been proposed yet. Unfortunately, unlike the broker reporting which takes place in January of the following year, the [Form] 8300 needs to be filed 15 days after you receive your digital assets. The [Form] 8300 currently does not have a place to report digital assets.
Walker: A lot of things. We talked a little bit about what the reporting is supposed to accomplish, and we talked about some of the gaps already, but what are some things that are probably not going to be fixed? You talked about tracking records and that sort of thing. Why is it still important for taxpayers to be able to track the cost basis or track their digital asset activity even once this reporting happens, whenever that might be?
Turanchik:The concern is if you don't track your cost basis, and you can't prove it up, the IRS's default position is, your cost basis is zero. Yes, zero. I have seen that, and I know this from my days at the Department of Justice, where there would be an IRS audit that came to my desk where the taxpayer simply didn't respond in the course of the examination.
Where the IRS had the gross proceeds recorded and until the taxpayer went to prove the cost basis, it was assumed to be zero. Now, one thing that was a success story of sorts. My particular taxpayer was deceased and her executor was a parish priest. He said, Steve, I don't know how to prove my cost basis. I said, don't worry, Father, I have subpoena power and I issued a subpoena to the custodian, and they provided the cost basis. After that, we got to the right tax result and the taxes paid. But look, in the digital asset space, the IRS isn't going to subpoena Coinbase for you, that's going to be on you. You got to be able to track and prove up your cost basis if it becomes an issue.
I had one client I brought through the streamline voluntary disclosure and the cost information, I won't say it was unreliable. But we took the conservative position that we're going to treat all of it as gain. The cost basis frankly was nominal to start with, but rather than trying to go through and track all that was a cost basis zero, whatever the proceeds are, and we have that number, that we're going to report as gain. It can be done from an administrative perspective, it is more conservative. But look, the reality is the prices of digital assets have dropped in the last 18 months or so. You might find yourself without significant gains and if you don't have your cost basis information, you may find yourself paying tax on something that you lost money on.
Walker: Not a good situation. We talked on part 1 of the podcast with Nick. We talked to a decent amount about possible options for people. Go back and listen to that one again, if you want to learn more about why you need to track, and maybe an Excel spreadsheet, not your best idea. I mentioned at the top that you're on the digital asset tax task force and so let's talk a little bit about the continued advocacy work that's being done in this area throughout this time, and will definitely continue.
Turanchik:We have provided comments on the [Sec.] 6045 proposed regs in an effort to highlight areas where we think there are real issues, gaps in reporting, the double reporting is a problem. The cost basis tracking, the more guidance the IRS can provide for practitioners, the more fluid it's going to be for tax compliance.
The simple reality is tax return preparers, we are the first guideposts. We are the first guardians of the Fisc, that if the return preparer is getting it wrong, you're less likely to have good compliance and the appropriate amount of tax reporting and payment. That guidance for return preparers provides us with the tools we need to tell our clients what needs to be done, and the reality is the IRS, even with the increased funding, doesn't have the ability to audit all taxpayers.
Rather, they're going to rely upon return preparers to ensure at least, the best compliance as possible for their clients. I also expect that we will be providing some comments on [Sec.] 6050I regs. On a personal matter, I think they should be repealed, but I don't think that's going to happen. I think the amount of information that's going to be reported to the IRS is going to be entirely overwhelming, and I will tell you in my conversations with folks both on the Hill and Treasury that they're not concerned. Their worst-case scenario is fine, we have more information we know what to do with, we'll figure it out or not figure it out.
Walker: I just go back to — it's not the same — but the whole discussion about the 1099-K and $600 is not a lot of money to have all these forms out there. Reporting is important. We're on this podcast to talk about reporting, and it is important. But also we have to think about the reality of the world.
Turanchik: I've done a fair amount of consulting on the 1099-K issues with third-party seller organizations, and it's a real issue. The biggest issue for me on the 1099-Ks is the payment for goods or services. Because a lot of transfers on those payment services, whether it's Venmo or PayPal, it's friends sharing expenses for dinner.
Walker: They just don't mark the right box or whatever it is.
Turanchik: They're not income events and the problem is if the wrong box is marked or worse, no box is marked, the [1099-] K gets reported to the IRS and the taxpayer now has received the form. They've got to go to their accountant.
Walker:What do I do with this?
Turanchik: I've got to deal with it in some way, shape or form. I think you report it and then back it out.
Walker: Again, we're talking about reporting. It's important. We'll just end on that note. Steve, any final thoughts to share with our listeners on just this topic of digital asset reporting, we'll definitely be talking more about this as things get finalized.
Turanchik:It's more a stay tuned because things will be changing. There will be additional developments. It's hard to say what they'll be. There's a lot out there, that still needs to be decided and we're still - early stages. This hasn't gone through litigation, it hasn't been tested. The good news, did I say there's good news? Treasury and the IRS at least are willing to listen to us and that is a good thing.
It's actually one thing I like about being in the tax community is that the folks at Treasury often times used to be in private practice and vice versa. The conversation is there not because practitioners are trying to help their clients evade taxes. It's that we are trying to make it as easy to be tax-compliant as possible. We want our clients to follow the law. We don't want them to get in trouble. Will there be bad actors? Of course, there will be.
Walker: There always are, in some worlds. Absolutely.
Turanchik: The vast majority want to be good actors, and that includes practitioners as well.
Walker: Absolutely. In closing on these podcasts, I like to think about us taking a journey together towards a better profession and in doing so I like to get a glimpse of my guests other journeys outside of the world of tax and digital assets and all of those things. Steve, share a page from your travel journey bucket list or a trip you have planned or something on your mind in that area.
Turanchik: During the pandemic, the year 2020, I turned 50, and I was supposed to go on a Safari with my wife that summer. That did not happen for a variety of reasons. Didn't happen in 2021 either. But in 2022, we did go on a Safari in Kenya, and it was the experience of a lifetime. It was absolutely amazing. I love the big cats, and we saw leopards, lions, elephants, zebras of course, and we were there for part of the migration, that was absolutely intense. It was always on my bucket list and my wife, you know what? I'll humor him. I'll go on it. She also absolutely loved it. It was fantastic. The downside is I'm not sure, I need to go at and again, I've seen everything I wanted to see. It was absolutely intense.
Walker:That's amazing. We had another guest who said the same thing. I can't remember which country they were in but said that the Safari was amazing. My husband also turned 50 in 2020. You and him are the same age. I'm a little bit younger, just a little bit. Thank you so much, Steve, for chatting with us today. We talked about reporting and all the things that are up in the air, but we're trying to help you learn what you need to know next.
This is April Walker from the Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast, and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much, and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and check out our other Odyssey episodes, as well as getting access to any resources we mentioned during the episode. Thank you so much for listening.
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