Ultimate Tax Guide for US Businesses Dealing With Crypto in 2023
What are the tax implications for American businesses accepting cryptocurrency?
On March 9, 2022, President Biden signed an executive order on crypto assets, to much fanfare. While some feted it as a sign of growing regulatory acceptance, others were quick to note its lack of detail.
So what are the tax implications for American businesses accepting cryptocurrency? Nothing new, as far as we can tell. But apart from Biden’s executive order, there are other upcoming cryptocurrency reporting requirements for American businesses that already accept, or are thinking of accepting, crypto. This article explains how U.S. businesses dealing with crypto can comply with these new regulations.
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Crypto Tax Regulations in the United States
Upcoming regulations. Last year, on November 15, 2021, President Biden had signed the Infrastructure Investment and Jobs Act into law. Despite its headline, it also quietly introduced unprecedented reporting obligations for U.S. persons and businesses transacting in cryptocurrency. These requirements will kick in on 1 January 2024.
The Infrastructure Act increases IRS reporting requirements for crypto by expanding two of its traditional reporting forms – Form 8300 and Form 1099-B. Specifically, persons who accept large payments in cryptocurrency in such a person's trade or business must fill out IRS Form 8300. Cryptocurrency and NFT exchanges, custodians, and their users must report their crypto trading activity, as well as gains and losses in IRS Form 1099-B, in addition to the existing Form 8949.
Similarly, the Financial Crimes Enforcement Network (FinCEN), intends to propose amending the Bank Secrecy Act (BSA) to include crypto as a type of reportable account, expanding current cryptocurrency reporting requirements for United States persons who own assets offshore.
Existing regulations. The Foreign Account Tax Compliance Act (FATCA) currently imposes reporting requirements for all “foreign financial assets” on Form 8938. That includes crypto assets. Resident taxpayers in the United States are subject to FATCA reporting if they own more than $50,000 in foreign financial assets at any point during the tax year, or $200,000 for individual U.S. taxpayers living abroad.
U.S. taxpayers must already report their capital gains and losses on crypto assets, which are treated as “property”. This is traditionally reported under Form 8949. Since 2020, the updated Form 1040, Schedule 1, also requires that every taxpayer must declare whether they have or have not used cryptocurrency in one way or another.
Confused? Fear not. All you need to know is that from January 2024 onwards, American taxpayers using crypto must report:
Form 8300: Crypto as Reportable "Cash"
Purpose. Originally designed to allow greater government surveillance of large cash transactions to curb illicit activities. Given its purpose, 8300 filing failures trigger harsher penalties than other reporting violations under the IRS Code, including felony charges punishable by up to five years of imprisonment and no financial penalty ceiling.
Applicability. This reporting was historically meant for physical cash transfers exceeding $10,000. Fast forward to 2022, the Infrastructure Act now redefines "cash" to include "any digital representation of value" involving distributed ledger technology, such as blockchain.
This definition is broad enough to cover cryptocurrencies as well as non-fungible tokens (NFTs). Notably, any exchange of digital assets settled in crypto (e.g. a purchase of NFTs with cryptocurrency) would also require both parties to report each other.
Thus, beginning January 1, 2024, any "person" (including an individual, corporation, partnership, association, trust or estate), in a trade or business who receives more than $10,000 in cash - or crypto - in a single transaction, or series of related transactions must file a Form 8300 within 15 days.
How to comply. To complete Form 8300, the recipient must verify and record the payer's personally identifiable information, including: the payer’s name, address, occupation, and taxpayer identification number; the identifying information of the person on whose behalf the transaction was conducted, a description of the transaction, and method of payment. Form 8300 filers are obligated to give written notice to every party named on the form by January 31 of following year. Copies of the Form 8300 also must be kept on record for five years.
Compliance on payments from otherwise unidentifiable virtual wallets presents additional challenges, as compared to fiat payment systems. Blockchain wallet addresses, especially self-custodial wallets, are pseudonymous. There is often nothing that ties an individual to the string of alphanumeric digits. Using an enterprise-grade platform like Request Finance to manage your crypto financial operations can help address this issue.
Users on the platform connect their wallet addresses to their accounts, where they include their real-world identifying information. Request Finance automatically fills-in crypto invoices with counterparties’ information, and wallet addresses when receiving or sending an invoice requesting payment in crypto.
Receipts must also be aggregated if they are related in a series of connected transactions, rendering any receipt of digital assets potentially reportable, if they exceed $10,000 within 15 days.
For instance, if a member of your team receives a monthly salary of $8,000 paid on the 20th of December, with a year-end bonus of $15,000 paid on the 30th of December, this would have to be reported, and both receipts would have to be aggregated.
A taxpayer is presumed to be in receipt of digital assets whenever they become held in an account or wallet address in the taxpayer's control. This can happen either through crypto payment received in a wallet address, or even through gaining possession of the private keys to a wallet with funds in it.
Importantly, receipt is considered to have occurred regardless of how long the assets are retained and whether they are subject to a custodial arrangement.
The IRS puts it this way: “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
Similarly, using Request Finance can help simplify compliance, by allowing businesses and individuals to view all their crypto invoices from a single dashboard, with real-time proof of receipt using on-chain data. These can be easily compiled for reporting purposes.
Moreover, all crypto transactions and invoices in Request Finance can be automatically denominated in fiat currencies at market prices using price oracles like Chainlink, making reporting less of a hassle.
Form 1099-B: Crypto as Reportable "Property"
Purpose. All 1099 reporting serves the same general purpose: to report non-employment related income to the IRS, i.e., income earned outside of a W2 form. Historically, Form 1099-B is a specific type of 1099 that reports capital gains and losses from securities or property involved in a transaction handled by a broker.
From January 1, 2024, pursuant to the Infrastructure Act, crypto assets are henceforth subject to reporting on IRS Form 1099-B. In comparison to Form 8300, the penalties for failing to file a form 1099-B are not as severe. But the fines can still add up and intentional failures can result in misdemeanor charges punishable by up to one year of imprisonment.
Applicability. Brokers and their users must now report to the IRS every transaction facilitated between the crypto buyer and the seller. The Infrastructure Act expands the definition of "broker" to target crypto exchanges, which now includes “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”. This would also include NFT marketplaces like OpenSea and SuperRare.
How to comply. Brokers are required to send their users, and the IRS a copy of individual trader’s 1099-B at the end of each year reporting trader’s cost basis, proceeds and associated gains or losses from each transaction that occurred on the broker’s platform.
If you or your business uses a crypto exchange, or DeFi yield farming platform to manage your crypto assets, you must submit the 1099-B provided by your platform, to report your capital gains or losses on your taxes to the IRS. This also includes gains or losses, on NFT minting fees, and trades.
Separately, your 1099-B typically provides all the information you need to fill out Form 8949, which compiles your capital gains and losses, and in turn feeds into your Form 1040 tax return using Schedule D.
But what happens when you make trades which are not through a centralized exchange, or platform? In a perfect world, you would be able to simply collect all your 1099-Bs from centralized exchanges. But what happens when you are trading on decentralized exchanges (DEX), or use NFTs in a play-to-earn game?
It is possible some CeDeFi platforms will be seen as brokers and have to report, but what about the truly decentralized ones? DeFi platforms and smart contract lending protocols like Uniswap certainly cannot provide you with a 1099-B.
Fortunately, there are crypto-focused tax software programs you can use to simplify the process. As long as you input data on all your crypto trades or earnings across all exchanges you’ve used, the software will generate the cost basis for your trades and help you determine your capital gains and losses.
A major challenge is accurately calculating the cost basis and tax on crypto.
"As crypto adoption grows and new innovations are introduced, businesses must turn to automation tools to address the accompanying rise in tax complexity”, says Tela Andrews who heads cryptocurrency tax software, BearTax.
Some crypto tax programs are compatible with regular tax programs like TurboTax or TaxAct, allowing you to easily import the capital gains and losses to your tax return.
Reporting Cryptocurrency Transactions and Holdings to FinCEN
FinCEN has separate reporting requirements for U.S. businesses using crypto - albeit not for taxation purposes. However, there are already significant overlaps with existing IRS reporting requirements regarding crypto transactions, and crypto assets held in wallets overseas.
Applicability. Currently, U.S. federal law requires financial institutions to report cash transactions over $10,000 conducted by, or on behalf of, one person, as well as multiple currency transactions that aggregate to be over $10,000 in a single day.
Purpose. These transactions are reported on Currency Transaction Reports (CTRs) to FinCEN. The federal law requiring these reports was passed to safeguard the financial industry from money laundering and other financial crimes.
How to comply. To comply with this law, financial institutions must obtain personal identification information about the individual conducting the transaction such as a Social Security number as well as a driver’s license or other government issued document. This requirement applies whether the individual conducting the transaction has an account relationship with the institution or not.
The Form 8300 filing requirement - which already covers crypto payments - is related to, but separate from, the Currency Transaction Report (“CTR”) form required to be filed by a “financial institution” covered by the BSA. A financial institution required to file a CTR does not necessarily have to also file a Form 8300.
However, the Form 8300 filing requirement is much broader than the CTR filing requirement – because it applies to all trades and businesses, regardless of the BSA. Thus, it is likely that a Form 8300 filer would not have to file a separate CTR on the same transactions.
Similarly, on FinCEN Forms 114, so-called Reports of Foreign Financial Accounts (FBAR), U.S. taxpayers who own offshore accounts with an aggregate value of $10,000 or more in any tax year must disclose their offshore accounts. Failing to do so can lead to steep penalties. For instance, “knowingly and willfully” filing a false FBAR can carry criminal penalties of up to five years of incarceration.
Currently, FBAR regulations do not define a foreign-held crypto wallets as a type of reportable account. For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the BSA regarding FBAR reports to include crypto wallets as a type of reportable account.
That said, the mandatory reporting of crypto-holdings to FinCEN is not far off from what is already required by the Foreign Account Tax Compliance Act (FATCA), whose reporting requirements are not specific to “foreign financial accounts”. FATCA applies to all “foreign financial assets” that exceed the statute’s reporting thresholds - this includes crypto assets.
FATCA reporting requirements apply to Individuals residing in the U.S. who own more than $50,000 in foreign financial assets at any point during the tax year, while this threshold increases to $200,000 for individual U.S. taxpayers living abroad. Like the Bank Secrecy Act, FATCA imposes substantial penalties -- including criminal penalties for willful and intentional violations.
Thus, establishing reporting requirements of crypto holdings to FinCEN would arguably only require what is already mandated by FATCA, only with a lower reporting threshold.
The Impact of Expanded Crypto-Reporting Obligations
For businesses that accept cryptocurrency or are planning to do so, these new IRS and FinCEN cryptocurrency reporting requirements create enormous challenges; imposing technological and logistical burdens; which can generate additional costs and management drag. American businesses accepting cryptocurrency may soon face tax and compliance issues that could become unmanageable for a business’s shareholders, partners, affiliates and other fiduciaries.
However, businesses who opt out of accepting cryptocurrency face being left behind. Blockchain-based payment rails are often cheaper, and faster. Programmable money, and assets also open up more innovative payment schedules, and treasury management tools to finance departments.
Request Finance already simplifies financial operations for CFOs at some of the largest web3 companies like DeFi protocol AAVE, and blockchain gaming platform, The Sandbox. In combination with crypto tax reporting software, these tools can further help businesses take on cryptocurrency reporting requirements, reduce the demands of building a cryptocurrency reporting system, and make compliance with crypto regulations simple.
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