New IRS reporting requirements for digital assets put on ice—for now

Getting your Trinity Audio player ready...

New guidance from the United States’ Internal Revenue Service (IRS) has said that new rules requiring that digital asset transactions over $10,000 be reported to authorities will not go into effect—for now.

Issued on Tuesday, the guidance says that “at this time, digital assets are not required to be included when determining whether cash received in in a single transaction (or two or more related transactions) meets the reporting threshold.”

However, the guidance makes clear that the rules (set out under section 6050I of the Internal Revenue Code) will go into effect once the IRS has issued specific guidance on how they will be enforced:

“The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS), however, intend to prescribe regulations to provide additional information and procedures for reporting the receipt of digital assets under section 6050I.”

No date was given for when to expect updated guidance or when the rules will begin to be enforced.

New rules cause concern for ‘crypto’ advocates

The subject has been one of consternation since the passing of Joe Biden’s Infrastructure Investment and Jobs Act in 2021, which contained a provision extending the reporting requirements around cash transactions—that any incoming business transaction valued at over $10,000 must be reported—to digital assets. Though passed into law in November of 2021, the relevant reporting rules were only set to apply to tax periods after December 31, 2023, meaning that the new obligations were originally thought to be effective from the start of this year.

On that basis, a lawsuit was filed against the Treasury and IRS, arguing that the rules amounted to, among other things, violations of constitutional protections against unreasonable search and violations of privacy. In particular, the plaintiffs expressed concerns that the information that would be reported under the rules could be used by the government to identify the senders and receivers involved in those transactions as well as their associated wallet addresses.

However, the case was dismissed in July 2023, in part because the rules were not yet in effect at the time of the lawsuit. Of the plaintiff’s concerns about government overreach, the Judge said, “the Court cannot find that this harm is likely to come to pass even upon the effective date of the amendment” and said that the plantiff’s theory is contingent on the government taking four steps: 1) receive disclosure of the relevant information, 2) use that information to go to the public ledger, identify the transactions in question and thereby identify the senders and receivers involved, 3) use that information to obtain the wallet addresses of those individuals or entities, and 4) use those addresses to search for other transactions involving those individuals or entities on the public ledger.

“For the alleged harm to materialize, the Government would have to complete all four of these steps, none of which the Plaintiffs allege has occurred. And, if the Government does not complete all four links in the chain, the harm will not arise. With all these links in the chain, the harm is entirely “contingent on future events that may not occur as anticipated, or indeed may not occur at all.”

The plaintiffs in that case are currently arguing an appeal before the Sixth Circuit.

The rules

The rules expand a pre-existing definition of ‘cash’ within the Internal Revenue Code to include ‘any digital asset,’ which is in turn defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary [of the Treasury].”

Under the Code, anyone who receives (in the course of trade or business) receives over $10,000 in cash must report that transaction to the IRS. By expanding the definition of cash to include digital assets, this obligation is merely expanded.

Failure to comply with the reporting obligations under 6050I can be met with civil and criminal penalties. Wilful failure to report a transaction can attach a penalty of up to $100,000 per failure. If it can be proved that an entity had knowledge of the reporting requirements and knowingly avoided them, it also constitutes a felony offense.

Precisely how these reporting obligations will be enforced by the IRS will presumably be the subject of the promised future guidance. The IRS and Treasury mention in this week’s announcement that they will issue new forms to fulfill the reporting requirements.

Regardless, the core of the rules are likely to stay the same: they apply to any transaction (meaning any single transaction or two or more related transactions) in which cash (including digital assets) has been received, so long as that transaction (or group of transactions) exceeds the value of $10,000.

Watch: Crypto regulation will make life easier for BSV