Record-Breaking Cryptocurrency Adoption Leads The IRS To Release New Reporting Requirements

WASHINGTON, DC – APRIL 15: The Internal Revenue Service (IRS) building stands on April 15, 2019 in … [+] Washington, DC. April 15 is the deadline in the United States for residents to file their income tax returns. (Photo by Zach Gibson/Getty Images)

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More projects than ever before across the entertainment industry landscape utilized cryptocurrency to develop unique infrastructures to fund productions and create new revenue streams with varying results. With some companies making a profit through these methods the Internal Revenue Service (IRS) has released first-of-its-kind reporting requirements for those who have dealt in crypto over the last tax year.

For this reporting period the terminology for reporting cryptocurrency on income tax forms has also been revamped, with it previously being known as “virtual currencies” it is now referred to as “digital assets”.

One 1040 income tax form iterates, “At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

The IRS’ subsequent checklist regarding digital assets explicitly states that if you have received, transferred, earned or sold cryptocurrencies for monetary gain then it must be reported. However, if an individual has just held on to a digital asset, transferred it between their own wallets or bought it with fiat then the reporting and taxation requirements change.

Abhinav Soomaney, the managing partner at CryptoTax International and senior associate at Neumeister & Associates LLP and author of Amazon Best Seller Cryptocurrency in a Nutshell: Unlocking the Decentralized has been assisting clients in the crypto reporting and blockchain space since 2018. On the recent updates for IRS reporting, he said:

“With crypto taxes, there are challenges quite often. NFT tax calculations are a recent challenge I can think of and tracking NFTs is extremely difficult.

A gallery assistant looks at a digital reproduction of the painting ‘Madonna del Cardellino (Madonna … [+] of the Goldfinch’ by Raphael, displayed as part of the ‘Eternalising Art History: From Da Vinci to Modigliani’ exhibition at the Unit London gallery in London on February 15, 2022. – So-called “NFT”, (non-fungible token) digital reproductions of six Italian masterpieces, including paintings by Leonardo da Vinci and Amedeo Modigliani, are on display in London as part of the exhibition, entitled “Eternalising Art History”. Each work has been duplicated in “the highest possible resolution” in cooperation with Italian museums, explains Serena Tabacchi of the Cinello company, and the digital copies have been certified by “NFT”, a non-interchangeable unit of data that allow a certificate of authenticity to be associated with any virtual object. Theoretically tamper-proof, NFTs are designed using the blockchain, which is the basis for cryptocurrencies such as bitcoin. In vogue on the art market, they reassure collectors against the risk of copying. – RESTRICTED TO EDITORIAL USE – MANDATORY MENTION OF THE ARTIST UPON PUBLICATION – TO ILLUSTRATE THE EVENT AS SPECIFIED IN THE CAPTION (Photo by JUSTIN TALLIS / AFP) / RESTRICTED TO EDITORIAL USE – MANDATORY MENTION OF THE ARTIST UPON PUBLICATION – TO ILLUSTRATE THE EVENT AS SPECIFIED IN THE CAPTION / RESTRICTED TO EDITORIAL USE – MANDATORY MENTION OF THE ARTIST UPON PUBLICATION – TO ILLUSTRATE THE EVENT AS SPECIFIED IN THE CAPTION (Photo by JUSTIN TALLIS/AFP via Getty Images)

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When NFTs are purchased, EthereumETH
(a cryptocurrency) is sent from the buyer’s wallet to the seller’s wallet and a new cost-basis pool is created. But when NFTs are transferred from one wallet to another and sold via over-the-counter (Over-the-counter trading refers to trading via agencies or people that carry out your transactions for you, isolated from regular exchanges), it becomes extremely difficult for us as accountants to track.”

He continued, “To overcome this, we have integrated an IT team that plugs in codes to pull appropriate information directly from the blockchain. Tracking the transfer of tokens from one wallet/exchange to another is a big challenge that we face. The most efficient and accurate way to handle this is using a manual transfer analysis whereby we combine all transfers made by the client and then arrange it chronologically to secure the appropriate cost basis and date acquired for tokens transferred and sold or held on another platform. We want to make sure this process is done correctly and that both the public and private sectors are happy.”

He further eluded to how the entertainment industry had to be careful not to ignore the new rulesets as at the time of the adoption of crypto for their projects reporting may have been different.

BURBANK, CALIFORNIA – Abhinav Soomaney at the launch of his new book in California.

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“With very limited government guidelines, every step of the crypto tax space can be looked at as a challenge, but we as crypto tax experts try our best to find a solution for all clients tailored to their needs. The film/TV and entertainment space has popularized trying to experiment with using crypto for budgets, fundraising, or artist payments over the past few years. Some people utilized this because of the lack of reporting infrastructure at the time, and the potential for currency value increase.”

“Regardless of the reasoning, income must be appropriately reported. Crypto is not an exemption.”

The IRS has ramped up its Criminal Investigation division as a result, onboarding hundreds of new agents for its digital assets and cybercrime division. The role in the department is to work and form a relationship with crypto firms to combat financial crime and make sure guidance is succinct and transparent.

PALM SPRINGS, CA – SEPTEMBER 1: An agent from the Internal Revenue Service Criminal Investigation … [+] Division works inside Palm Springs City Hall lobby on September 1, 2015 in Palm Springs, California. FBI agents working with a local public corruption task force executed search warrants during a raid on Palm Springs City Hall early this morning. (Photo by Gregg Felsen/Getty Images)

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Talking to Business Insider, Jeremy Johnson, a Texas-based certified public accountant, agreed with Soomaney’s perspective. “It can open up a can of worms if you don’t report your crypto,” he said. “So, no matter how big or small your gains, report your activity.”

Source: https://www.forbes.com/sites/joshwilson/2023/02/08/record-breaking-cryptocurrency-adoption-leads-the-irs-to-release-new-reporting-requirements/