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Compliance & Regulation Shifts: Navigating Changes to Avoid Penalties for Your Business

Compliance & Regulation Shifts: Navigating Changes to Avoid Penalties for Your Business

Uncover essential strategies for navigating the 2023 crypto tax changes and avoiding penalties in your business.

One reason cryptocurrency is fascinating is how the sector created value literally out of thin air. A less fascinating result for crypto investors is that crypto’s success has now firmly captured the US Treasury and Internal Revenue Service (IRS) attention.

Before 2023, the IRS treated cryptocurrencies as property for tax purposes, meaning that general tax principles applicable to property transactions apply to transactions using virtual currency. This included paying taxes on capital gains and reporting any cryptocurrency received as payment for goods or services as income.

However, there was limited detailed guidance on reporting, compliance specifics, and classification of various types of digital assets like NFTs. On August 25, 2023, The US Treasury issued new crypto tax regulations to bring crypto “into the fold,” so to speak, by aligning digital asset taxation with existing tax laws.

The regulations seek to clarify reporting requirements for digital asset transactions, ensuring that taxpayers declare and pay appropriate taxes on crypto earnings. Let’s look at the recent regulatory changes and possible impacts on business operations.

2023 Regulatory Changes in the Crypto Space

The 2023 tax regulations, proposed by the US Treasury Department in collaboration with the IRS, aim to provide a clear framework for digital asset transactions and tax obligations. One of the most controversial rulings has to do with digital asset brokers.

Digital Asset Brokers

The new regulations introduce a reporting requirement for digital asset brokers, including defining who is and is not a broker.

A digital asset broker actively facilitates the transfer of digital assets, much like stockbrokers who facilitate stock trades and provide their clients and the IRS with necessary reporting. New IRS regulations require these digital asset brokers to submit detailed transaction reports.

In 2025, digital asset brokers must start reporting gross proceeds from digital asset transactions.

This requirement becomes more comprehensive in 2026, when brokers must report the gross proceeds and the adjusted cost basis, which is crucial for calculating capital gains and losses.

A digital asset broker’s exact definition and scope can vary depending on specific regulatory guidelines and interpretations. If you have questions or need clarification about your business’ status, consult an attorney specializing in digital assets, federal tax law, and taxes within your jurisdiction.

Digital Asset Broker Activities

As defined by the new regulations, brokerage activities involve acting as an intermediary in transferring digital assets between parties. These activities include services like matching buyers and sellers, executing client trades, providing essential transactional infrastructure such as trading platforms, and offering related services like asset custody or valuation.

Form 1099-B to 1099-DA

Digital asset brokers now must meet tax documentation obligations by providing detailed records of digital asset transactions to the IRS and their customers. This requirement is similar to how stockbrokers issue a 1099-B form, which details the sale of stocks and other securities. Beginning in tax year 2023, the IRS will require digital asset brokers to use a similar form to report transactions.

The IRS is developing Form 1099-DA, which digital asset brokers will use to report various details, including acquisition dates, cost basis, sale or disposition dates, and sales proceeds of digital assets.

In the context of brokers, Form 1099-B (or 1099-DA) is crucial for reporting the sale of securities and, by extension, digital assets. It includes important details such as the date of purchase, the sale price, and the cost basis of the assets sold.

Furthermore, the regulations stipulate that starting January 1, 2025, real estate reporting entities involved in digital asset transactions must report these transactions on IRS Form 1099-S, including the fair market value of digital assets used in real estate transactions.

The cost basis information is essential for taxpayers to accurately calculate their capital gains or losses for tax purposes. Let’s take a quick look.

Cost Basis and Crypto Tax Reporting

Tracking and reporting the original purchase value, or cost basis, of each digital asset unit sold is essential. The cost basis, usually the purchase price, is crucial for tax purposes as it is the basis for calculating any capital gains or losses upon the asset’s sale.

Given the complexity involved, especially for accounts with a high volume of transactions, managing the cost basis can quickly become a recordkeeping nightmare. ZenLedger specializes in this area, offering expertise and support. Check out our Compliance Center for more information.

Form W-9/W-8 for Crypto Tax Compliance

Starting in 2025, the IRS will require brokers to collect accurate tax identification numbers via Form W-9 from their US customers. This requirement applies to all accounts – new, existing, and those belonging to non-U.S. entities.

Are NFTs and Stablecoins Taxable?

The IRS released its first NFT-specific guidance in May, clarifying that NFTs and stablecoins are digital assets for tax purposes.

NFTs are a complex tax area because there are so many potential different types of NFTs. Also, the IRS is grappling with nuances around the fact that NFTs technically are digital tokens representing another asset, which may or may not be digital.

The IRS will likely refine the tax status of different categories of NFTs over time. Avid NFT collectors should keep updated on the latest developments and consult a qualified attorney to devise a tax strategy.

Crypto Tax Regulation’s Impact on Business Operations

While incorporating any regulatory change can often feel heavy, one way to reduce friction is to take a strategic approach. Set aside time to craft a strategy that reflects your business landscape.

Here are some ideas to help you efficiently integrate the IRS’s new crypto tax changes into business processes:

  • Develop Internal Policies: Create or update internal policies to align with the new regulations, including policies on customer onboarding, transaction monitoring, and reporting.
  • Automated Tax Software Implementation: Specialized tax software, like ZenLedger’s industry-leading solutions, is essential to handle the specifics of crypto taxation. This software automates the calculation of gains, losses, and cost basis for digital assets, ensuring compliance with the new regulations.
  • Training and Education: Invest in training for your finance and tax teams. Understanding the nuances of the new crypto tax laws is crucial for accurate reporting and compliance.
  • Consulting Tax Experts: Engage with tax advisors or consultants specializing in digital assets, especially if your business is NFT-related. They can offer guidance on the latest tax laws and help structure your reporting processes.
  • Integration with Crypto Exchanges and Wallets: Establish direct data integrations with crypto exchanges and wallet providers to ensure seamless and accurate transfer of transaction data for reporting purposes.
  • Customer Communication and Compliance: Inform your customers about the need for proper documentation, such as Form W-9 for US customers. Clear communication can aid in compliance and smooth out the data collection process.
  • Stay Updated: Keep abreast of regulatory changes and IRS guidelines. Regularly review updates from the IRS and Treasury Department to ensure ongoing compliance.

Adapting to regulatory changes is an ongoing process, and staying proactive is critical to successful compliance.

Penalties for Non-Compliance with Crypto Tax Regulations

Unsurprisingly, the IRS does not consider crypto a special case. There are no special exemptions for crypto tax-related non-compliance. If anything, crypto taxes are now under the IRS microscope.

Non-compliance with IRS crypto tax regulations can result in expensive penalties. For example, if the IRS discovers undeclared income, they may levy a penalty of 75% to be paid in addition to the unpaid tax, almost doubling the payable tax.

If that’s not scary enough, don’t forget that jail time for cryptocurrency tax evasion can and does happen.

With any kind of taxes, to avoid penalties and worst-case scenarios, it’s important to file and pay taxes on time, keep accurate records of all transactions, understand the tax implications, and seek professional help if necessary.

The IRS increasingly focuses on ensuring compliance among crypto investors, making it crucial to stay informed and adhere to tax laws.

Voluntary Compliance and Early Crypto Tax Reporting

For proactive firms looking to get ahead of their competitors, consider taking advantage of the window before the required deadlines, as it could result in a competitive advantage. Another advantage of note is the ease of the overall internal transition.

The IRS allows digital asset brokers to begin their reporting voluntarily before the required deadlines in 2025 and 2026. While there are no specific early reporting incentives from the IRS, there are several advantages to choosing that path. Firms that take the lead build trust and transparency. They also avoid (most of) the stress of last-minute hassles.

A phased approach to early compliance can make the process smoother and position your firm as an industry leader.

Moving Ahead with US Crypto Tax Compliance

While it’s true that paying taxes is never the fun part of making money, a professional, proactive approach can ease the strain. Crypto regulation is complex and still evolving. You don’t have to tackle this new world alone. ZenLedger has the tools and expertise to help.

Navigating Crypto Taxes and Compliance for your business? Learn more about how ZenLedger can help!

Disclaimer: This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Kala Philo