This blog was last updated on March 31, 2021
“Regulation always follows innovation, and sometimes, in democracies, it follows a little further behind other jurisdictions.”
– Chris Giancarlo, CFTC Chairman
Regulators at the IRS, SEC and CFTC have been playing catch-up for years, and in their defense, it’s not easy to hit a moving target. The digital asset ecosystem continues to grow exponentially and gain institutional traction daily. This level of adoption provides a tailwind for the entire ecosystem and the tide rises for all.
As digital assets continue to penetrate Wall Street and Main Street alike, establishing a regulatory framework for this new asset class has become a top priority at the IRS. This past September, the Treasury Inspector General for Tax Administration released a report titled, “The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions.” The crux of the report can be summed up here:
“The IRS cannot easily identify taxpayers with virtual currency transactions because of the lack of third-party information reporting that specifically identifies virtual currency transactions. An information reporting regime that requires all virtual currency exchanges to report all virtual currency transactions to the IRS would benefit tax compliance by closing the information gap with respect to virtual currencies.”
As a result, it is recommended (and agreed upon by management at the IRS) that the IRS develop guidance on third-party reporting under I.R.C. 6045.
I.R.C. 6045 does not simply mandate a new form but ushers in a host of compliance requirements that many virtual asset service providers are woefully unprepared for.
Crypto compliance obligations
Similarly, the Office of Economic & Cooperative Development (OECD) has also indicated that it is drafting a framework for reporting of crypto transactions and account balances by VASPs. This framework will rely upon the existing Common Reporting Standard (CRS) that financial institutions and insurers comply with for financial services transactions. Over 100 countries participate in this tax reporting regime worldwide so VASPs operating in different countries will need to prepare for similar tax identification and information reporting requirements following this global regime.
Building an actionable strategic plan to address these new compliance obligations is paramount. No one can say for sure when guidance will be issued but being prepared is imperative.
Crypto tax workshop
During our upcoming Crypto Tax Workshop we’ll detail the necessary preparations all virtual asset service providers need to make as they begin to build a tax withholding and reporting compliance program. We’ve assembled a panel of thought-leaders to help you understand how this new guidance will impact your organization and the tangible steps you can take to build a strategic plan moving forward. Sessions included:
W8/W9 Collection & Withholding – Jessica Metts, ComplyExchange
Section 6045 guidance will not only require increased tax reporting obligations for both domestic and international companies but also helps solidify rules related to how and what tax identity information is required to be collected as well as corresponding withholding taxes applicable on crypto transactions involving U.S. and non-U.S. account holders.
Crypto Accounting & Back Office – Sean Ryan, NODE40
Accounting and back office operations at virtual asset service providers is about to become much more complex. In addition to cost-basis considerations accounting and operations professionals will need to develop a strategic plan for tax data management, TIN matching, penalty notices withholding and payment processing.
1099, 1042-S Tax Reporting Obligations – Wendy Walker, Sovos
The U.S. Treasury Inspector General for Tax Administration’s recent report provided a glimpse into what we can expect for potential 1099-B reporting. In addition, the Office of Economic & Cooperative Development (OECD) will soon incorporate crypto transactions into the existing Common Reporting Standard (CRS) regime which will impact tax reporting requirements for businesses in more than 100 countries.
Unclaimed Property Considerations – Kristine Butterbaugh, Sovos
Another reporting compliance consideration that VASPs need to be prepared for is their obligations associated with reporting unclaimed property to the states. Unclaimed property obligations need to be top of mind for every crypto exchange and custodian of virtual assets. The “crypto boom” of 2017 brought millions of retail investors into the industry — and the typical state dormancy period is three years so 2017 assets will be 2021 unclaimed property reporting obligations. Failure to report unclaimed property can result in big penalties.
Jurisdictional & Product Expansion – Noah Buxton, Armanino
Tax planning is more than tax compliance. Tax and compliance professionals in the VASP space deal with unique challenges, ambiguous guidance and roller-coaster growth. Building a cohesive structure that prepares the company for expansion over the long-term is crucial to managing tax risk and exposure.
Guidance is going to come fast and hard. Hell, it may have already been issued between the time we post this blog and our upcoming event! No doubt increased regulations present growing pains for this newly emerging ecosystem however the organizations who embrace compliance as a competitive advantage will reap the benefits as mainstream adoption continues to accelerate.
Take Action
Join us and our panel of experts on April 20th from 1pm – 5pm ET as we break down incoming compliance and reporting obligations, discuss the impact on virtual asset service providers and build a roadmap to keep your company in compliance.
