crypto

Perspectives

Tax reporting in the age of cryptocurrency

Getting ready for cryptocurrency tax regulation

US lawmakers have enacted new tax reporting provisions for crypto and other digital assets. 2023 is a key year for implementation of these rules, and four key considerations can help organizations gauge what it will take to be ready.

Crypto goes mainstream

There are growing indications that crypto has become too big—and too mainstream—for tax authorities to ignore. The numbers are notable: At the end of last year, it was estimated there were more than 68 million crypto wallet holders in the United States alone (more than 108 million globally)1  and around 2,300 US businesses accepted bitcoin2. In fact, chances are high that someone in your circle of friends and neighbors owns (or perhaps even mines) crypto.

The writing is on the wall. Greater volumes and values are being traded through crypto. Enterprises are using them to transact. Consumers and retailers are increasingly comfortable with digital assets, and now governments and people are looking for greater clarity on how their transactions should be taxed and reported.

The challenge with clarifying and imposing tax regulation is that the field is both emerging and evolving. That makes it very difficult for tax authorities to understand how crypto should be reported, by whom, and where. Over the past few years, some tax authorities (including the IRS in the United States) have relied on so-called John Doe summons to get at the information they need in order to properly identify transactions and to communicate their interest in obtaining this information. But there is wide recognition that a more sophisticated and proactive approach is needed.

For the US Treasury and various tax authorities around the world, that could also translate into significant revenue. In the United States alone, the White House estimates closing the crypto reporting gap could net up to $28 billion in new tax revenues over the next 10 years3. Recent analysis by Dutch researchers indicates the EU could have captured tax revenues of €850 million (US$986 million) in 2020 had it applied national tax rules to just one of the main cryptocurrencies, Bitcoin4  (the largest, yet certainly not the only, digital asset). Given the exponential growth of crypto, many pundits expect those forecasts to quickly be shattered.

 

Forces collide

Crypto is emerging in the tax spotlight at an interesting time. Over the past few decades, tax authorities globally have been hard at work developing global tax information reporting standards. Many were already concerned they were losing revenue due to corporate base erosion and profit-shifting activity.

Regulators have long been focused on clarifying and enforcing anti-money laundering (AML) requirements and applicability, more recently honing in on crypto and the related activities of financial institutions. That has led to increased focus on areas such as customer onboarding and due diligence, regulatory compliance, risk management, and tax reporting. This trend will only increase as coverage is expanded to applicable commercial businesses.

Tax authorities know that global information reporting drives compliance. For the most part, corporations and individuals want to pay the correct taxes to the correct authorities. Harmonization and clarification of reporting helps them do that. And coordinated global information reporting ensures taxpayers aren’t subjected to double taxation as a result.

It should surprise no one, therefore, that these two big trends are colliding. Tax authorities and regulators want to bring crypto into the Global Information Reporting system. Legislators and regulators are supporting this initiative and assisting them to make it happen.

 

Expectations take shape

Significant news on this front comes out of the United States. In early November 2021, the Infrastructure Investment and Jobs Act was passed, which included a range of provisions aimed at bringing cryptocurrencies and other digital assets into the scope of existing codes (sections 6045 and 6050I, in particular)5.

The new law included a number of important changes—it defines “digital assets,” redefines “brokers” to include those providing any type of client-facing transfer service for digital assets, and redefines “specified security” to include digital assets, thereby including cryptocurrency in scope for Form 1099-B reporting.

The new law specifies a requirement for transfer statements to be furnished between brokers when digital assets are transferred, and it attempts to close gaps by extending transfer reporting to include transfers to non-brokers. The law also includes changes to Form 8300 reporting to include digital assets in the definition of “cash,” requiring businesses to report any digital asset receipt that exceeds $10,000 in digital asset value.

The US Treasury Department is not the only major organization eyeing crypto. The OECD has been working to create a new Common Reporting Standard (CRS) that specifically addresses virtual assets. Having gone through a round of industry consultation, the draft is expected to be released before the end of this year.

Unwilling to wait for the OECD to release guidance, the European Commission has moved forward with its own proposal. DAC-8 is intended to update the EU’s tax code by strengthening the existing rules and exchange of information frameworks to include crypto assets. An industry consultation process was executed in the spring of 2021, and observers expect drafts to circulate before the end of the year.

These proposed regulations sit on top of a complex web of existing national and global frameworks and tax rules regarding crypto assets and currencies. In many markets, the topic of crypto is being discussed by numerous different authorities—from financial stability boards to the US Treasury. Each is now considering how it will address concerns rising in its particular sphere.

 

Prepare yourself

The impact of these proposals—individually and in combination—will likely be significant. For those who already boast robust information reporting capabilities and processes, preparing for the new requirements will likely take some careful thinking. Those with less capability or experience in this area may find themselves facing some rather heavy lifting.

That being said, there are four areas in particular that every organization should think about before considering what it will take to achieve compliance: applicability, requirements, impact, and operations.

It’s on the agenda now

There is no longer any question as to whether crypto will be in scope for global information reporting purposes. For the United States, it is now here; outside of the United States, it’s a matter time. There is little doubt that these changes will have an impact on traditional financial services firms and digital asset ecosystem players alike. The question is what it will take to become compliant.

For crypto advocates and ecosystem participants, there is one very clear message in all of this: Crypto is now being seriously debated and explored at the very highest levels of various governments. For the first time, the definition of digital assets has landed explicitly in the US Internal Revenue Code. If you had any doubts as to the relevance and maturity of the industry, think again.

 

Authors

Denise Hintzke
Managing Director
Global Information Reporting
Deloitte Tax LLP

Peter Larsen
Principal
Deloitte Tax LLP

Rob Massey
Partner
Deloitte Tax LLP

John Wagner
Managing Director
Deloitte Transactions and Business Analytics LLP

 

Endnotes

1  Statista, “Number of Blockchain wallet users worldwide from November 2011 to November 4, 2021 
2  Maddie Shepherd, “How many businesses accept Bitcoin? Full list (2021) ,” Fundera, December 16, 2020.
Joint Committee on Taxation, Joint Committee on Taxation Report JCX-33-21 (August 02, 2021) .
Andreas Thiemann, Cryptocurrencies: An empirical view from a tax perspective, JRC Working Papers on Taxation and Structural Reforms No. 12/2021  
5  European Commission, Joint Research Center, 2021.
Infrastructure Investment and Jobs Act, HR 3684 , 117th Cong. (2021).