Questions remain over rule requiring large crypto payments to be reported to the IRS

Questions remain over how a new rule requiring big crypto payments to be reported to the IRS, along with personal data of senders, is to be interpreted and enacted.

U.S. crypto users engaged in trade or business must now report any crypto transactions made of $10,000 and more to the Internal Revenue Service, according to Coin Center's interpretation of an amendment to the U.S. Internal Revenue Code.

In a post on X on Tuesday, Coin Center's Executive Director Jerry Brito pointed to the amendment that came into force on Jan. 1. The amendment, introduced in the 2021 Infrastructure Investment and Jobs Act, makes transactions with digital assets subject to the same reporting rules as cash transactions. 

This means that anyone who received crypto worth $10,000 or more in one or several related transactions must report it to the IRS within 15 days or face potential felony charges, Brito wrote in the Coin Center blog.  The report must include the name, address and social security number of the person from whom the funds were received, the amount received, and the date and nature of the transaction.

At the same time, the question of when the new norm applies is also open. For instance, CoinTracker Head of Tax Strategy Shehan Chandrasekra claims that people who do crypto as a "hobby" are out of reach of the new rule.

"The majority of casual crypto investors in the U.S. do not have a 'trade or business' for tax purposes," Chandrasekra told The Block. "For an investor to become a trade or business (AKA obtain trader status) they have to make a tax election with the IRS called sec 475. This is only applicable to high-frequency stock traders at the moment. Therefore, under the current tax code, a crypto investor (even if they want to be a trade or business) can not technically have a 'trade or business,'" he added.

The IRS did not respond to The Block's request for comment by press time.

Court challenge

In 2022, Coin Center challenged the amendment in court, saying that it would allow the government to destroy the privacy of blockchain transactions and trace how individuals and businesses spend their crypto.

In July 2023, the Kentucky district judge granted the U.S. Treasury's motion to dismiss the complaint, saying that "the probability of the Government doing so is not substantial enough to warrant judicial review, weighing against a finding of ripeness." The case is now in the court of appeals.

Lacking the court ruling, the law is now in force, Brito wrote. "It is a self-executing law, meaning that there is no requirement for any additional regulatory action or implementation by a government agency for it to be enforced," he posted.

Legal uncertainty

In addition to apparent privacy implications, the new rules bring additional legal uncertainty as the IRS hasn't yet issued any specific guidance for the matter, Brito added. Crypto transactions sometimes don't even have a distinct sender with a name and social security number.

"For example, if a miner or validator receives block rewards in excess of $10,000, whose name, address, and Social Security number do they report? If you engage in an on-chain decentralized exchange of crypto for crypto and you therefore receive $10,000 in cryptocurrency, who do you report?" Brito wrote.

It's also not clear to whom the transactions should be reported to, as cash transactions are normally reported via using Form 8300, which is sent to FinCEN as well as the IRS. However, "unlike with physical cash transactions, FinCEN has no authority to collect reports concerning cryptocurrency transactions," Brito wrote, adding that there is also no guidance as to how to estimate the fiat value of crypto for that matter.

"The law is silent on this matter and the IRS has not issued any guidance answering these and other questions," Brito wrote.