Businesses and professional traders who receive $10,000 worth of virtual currency must report the transaction to the Internal Revenue Service.
Those who fail to comply may be charged with a felony.
The reporting requirement, which went into effect on January 1, was originally part of Section 6050I of the Infrastructure Investment and Jobs Act, passed by Congress in November 2021.
Despite the potential legal risks, there is little guidance or clarification from the IRS as to who is actually subject to reporting requirements.
This has raised concerns about whether the law applies to traders (both amateurs and professionals) who use decentralized financial protocols without physical addresses or social security numbers.
Shehan Chandrasekera, head of tax strategy at CoinTracker, told Blockworks that 6050I applies to persons (which may be individuals or businesses) engaged in a “trade or business.”
“Simply put, they need to do something business-wise,” Chandrasekera said. “If you are just a crypto investor (the vast majority of crypto users in the US), you do not have a trade or business. Therefore, you will not be affected by 6050I.”
To determine whether a DAO contributor qualifies as a “trade or business,” some questions to consider include:
- Is contributing to a DAO a full-time self-employed job?
- Is this your main source of income?
- Are you doing this full time year round?
“If the answer to all of the above is yes (there may be other qualitative questions depending on the situation), then you are running a “trade or business” and may be subject to a 6050I. ,” Chandrasekera said.
For example, a similar logic can be applied to airdrop farmers. If managing an airdrop is a full-time occupation, that person may be subject to reporting obligations, but someone who receives a one-time airdrop assignment may not be subject to reporting obligations. There is a gender.
For stakers, Chandrasekera explains that if you're a staker on a major exchange and you're paid but have another primary source of income, you likely won't be required to report to the IRS. On the other hand, individuals or organizations that operate professional staking pools and earn commission income are subject to reporting requirements.
Still, the details of how an individual or trader engages in staking can also impact whether there is a reporting obligation, said Darien, a certified public accountant (CPA) and Web3 cryptocurrency tax advisory firm.・Cameron Brown, a partner at Advisors, told Blockworks.
“If they're trading through a business entity and charging $10,000 in harvest farming fees, that's a possibility. If they're only trading as an individual, that's not the case,” Brown said. “I have several clients who do business through partnerships/corporates/companies and they will definitely be affected if this happens.”
At this time, there is no clarity from the IRS as to what is and is not considered trade or business activity.
“This is a subjective standard and intersects with many other sections of the IRS Code. Some court cases have made this clear regarding the facts relevant to the case. However, there is no clear line of demarcation. There are no rules,” Chandrasekera said.
This ambiguity led crypto think tank Coin Center to take matters into its own hands. Already in June 2022, Coin Center filed a court challenge against the U.S. Treasury Department, arguing that the IRS regulations are unconstitutional.
“The very difficult nature of this requirement will become apparent if someone makes such a donation, but does so anonymously by simply submitting it to us. [bitcoin or ether] to our public address. Who could be listed as the sender in this case? These are all questions that the Treasury Department has yet to answer,” Coin Center Executive Director Jerry Brito said in a blog post.
Brito added that Coin Center's team will continue to fight the law in court while determining how to comply with the law in the meantime.
Chandrasekera said that outside of cryptocurrencies, many taxpayers want to be treated as a trade or business because they can deduct business-related expenses, which the IRS considers a “hobby.” He pointed out that this was not the case.
Don't miss the next big story – join our free daily newsletter.
