Treasury Offers Something for Everyone to Comply With: Trades and Businesses, Banks, Crypto Exchangers and Individuals
On May 21, 2021, the U.S. Department of Treasury (“Treasury”) released its American Families Plan Tax Compliance Agenda (“Agenda”), a comprehensive set of initiatives to increase tax compliance and close the “tax gap” between the amount taxpayers owe and the amount that is actually paid. While part of the $80 billion plan calls for providing Treasury and specifically the Internal Revenue Service (“IRS”) with additional resources to combat tax evasion, the Agenda also proposes revisions to current regulations and leveraging existing infrastructure to “shed light on previously opaque income sources;” namely, cryptocurrency. Although the sweeping Agenda obviously focuses on tax compliance, it also has related consequences for Bank Secrecy Act (“BSA”) compliance in areas where the BSA and the tax code overlap as to cryptocurrency.
The Agenda also represents the latest in a string of initiatives by the U.S. government regarding the increasing regulation of the use of cryptocurrency, whether by direct users, exchangers of cryptocurrency, or financial institutions with customers dealing in cryptocurrency. The Agenda represents both an acknowledgement by the U.S. Treasury that cryptocurrency use has become “normalized,” coupled with a clear signal that its use will be highly scrutinized and regulated.
A Crypto Form 8300 – and Potentially Expanded Tax Reporting Forms for Both Banks and Crypto Exchangers
Of particular interest, the Agenda proposes requiring businesses that receive cryptocurrency payments of a fair market value of at least $10,000 to report them, presumably through a reporting form that equals or approximates the existing Form 8300. The Agenda lays out its simultaneous concerns regarding – and acceptance of – the growing use of cryptocurrency as follows:
Still another significant concern is virtual currencies, which have grown to $2 trillion in market capitalization. Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion. This is why the President’s proposal includes additional resources for the IRS to address the growth of cryptoassets. Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade, especially in the presence of a broad-based financial account reporting regime . . . . [A]s with cash transactions, businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported. Although cryptocurrency is a small share of current business transactions, such comprehensive reporting is necessary to minimize the incentives and opportunity to shift income out of the new information reporting regime.
Generally, a Form 8300 must be filed, under both the BSA and the tax code, by a business receiving over $10,000 in “cash” in the course of its trade or business in regards to a single transaction or related transactions. For the purposes of the Form 8300 requirement, “cash” to date has been defined as paper currency or certain monetary instruments, under defined circumstances – but not to include cryptocurrency. The Form 8300 filing requirement 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 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 – and that is exactly what Treasury now appears to contemplate in regards to a cryptocurrency transaction reporting requirement. If so, its application therefore could be very broad. Arguably, and given the increasing use of cryptocurrency, one analogy would be a new reporting requirement for all wire or electronic transactions over $10,000 – i.e., a reporting requirement that applies to multitudinous and mundane transactions in today’s digital economy, untethered to the use of paper currency. If Treasury were to announce a new reporting requirement for any business or financial institution that received a wire or ACH transfer over $10,000, that would be shocking. But that is exactly the reporting requirement that Treasury now is proposing in regards to cryptocurrency.
Compliance with such a reporting regime obviously will present legal and practical challenges. For instance, the current Form 8300 requires businesses to provide, under penalty of perjury, the personal identity information of the individual paying in currency, including the individual’s full name, taxpayer identification number, address, and date of birth. Although this requirement is arguably a straightforward task when a business receives physical currency, it will be complicated when that payment comes from an otherwise unidentifiable virtual wallet – although presumably the very point of U.S. Treasury in proposing this reporting requirement is that the owners of such wallets must be identified, going forward. Stated otherwise, the government is attempting to impose transparency upon a transactional system that, historically, was created at least in part to value and promote anonymity.
The current Form 8300 also requires businesses to report when they receive a single or multiple related payments that aggregate to more than $10,000 within a 12-month period. Again, this task will be complicated as a practical matter in light of the volatile characteristics of many cryptocurrencies. Because the value of a cryptocurrency is tied to its fair market value, per the IRS’s own rules, which regards cryptocurrency as “property,” calculating whether the $10,000 reporting threshold has been triggered in particular instances may be difficult.
Relatedly, the Agenda also seeks to “implement comprehensive information reporting regimes” that would cover crypto asset exchanges and custodians – along with other financial institutions including banks. This would be a significant change to the IRS third-party reporting regime that would seek to capture all potential income sources. To achieve such a goal, the IRS may expand the current Form 1099-INT, which currently is used to report only interest income earned by a taxpayer. The new Form 1099 would require the reporting of gross inflows and outflows on all business and personal accounts from financial institutions, from banks to cryptocurrency exchanges, at least as to certain taxpayers. The purpose of this reporting requirement would be to better track the flow of assets, whether regarded by a reporting institution as “income” or not. It appears to be intended to assist the IRS with both investigatory leads and so-called “indirect methods” of proof regarding unreported income, which historically have relied on calculating a taxpayer’s net worth, expenditures and/or bank deposits and comparing that information with the taxpayer’s reported income, after excluding non-taxable sources of income.
The Agenda Fits Within the Larger Crypto Regulatory and Enforcement Effort
These initiatives are yet additional pieces being added to the patchwork quilt of expanding enforcement and regulation of cryptocurrencies and the taxpayers that hold them:
- In late 2020, the Financial Crimes Enforcement Network (“FinCEN”) proposed a new rule for “unhosted” virtual currency wallets (i.e., wallets that are not provided by a financial institution or other service and reside instead on a user’s personal device or offline). This proposed rule is related to the Form 8300 reporting requirement proposed by the Agenda, and would apply when the Form 8300 would not. Specifically, for transactions involving an unhosted or otherwise covered wallet, and where the value of the transaction is greater than $10,000, the proposed rule would require banks and money services businesses covered by the BSA to submit a detailed report to FinCEN analogous to a CTR, which would have to contain the following information, among other things:
- The full name and physical address of the financial institution’s client.
- The name and physical address of “each counterparty to the transaction of the financial institution’s customer.”
- The amount and type of virtual currency or digital asset being transacted.
- The “assessed value of the transaction” in U.S. Dollars.
- All other information that “uniquely identifies the transaction, the accounts, and, to the extent reasonably available, the parties involved.”
This proposed rule likely offers a template for the Form 8300-like reporting requirement contemplated by the Agenda. As we previously blogged, adoption of this rule would create significant recordkeeping, reporting, and identity verification requirements for banks and money service businesses to ensure that counterparties to digital currency transactions have wallets hosted by a covered financial institution.
- The Anti-Money Laundering Act of 2020’s definition of a “money transmitter” subject to the BSA now includes businesses engaged in the exchange or transmission of “value that substitutes for currency,” e. cryptocurrency. This definition formalizes the long-standing position of FinCEN.
- As the Agenda observes in a footnote, the IRS recently amended Form 1040 for individual taxpayers to require them to report whether they sold, sent, exchanged, or otherwise acquired any financial interest in any cryptocurrency.
- As we previously blogged, in late 2020, FinCEN proposed that the term “money,” as it is used within the terms “funds transfer,” “payment order,” and “transmittal of funds,” for the purpose of applying the Recordkeeping and Travel Rules, should include convertible virtual currencies. The proposal also would revise BSA regulations so that the Recordkeeping Rule and Travel Rule would apply to domestic and cross-border transactions in convertible virtual currencies and digital assets having legal tender status. Importantly, the proposed regulation would reduce the current $3,000 threshold for both the Recordkeeping and Travel Rules to only $250 for international transfers, thereby substantially expanding the scope of these rules.
- FinCEN also signaled its intent to amend BSA Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), which currently requires taxpayers to file an FBAR if they hold a financial interest or signatory authority over one or more “financial accounts” located outside the United States, if the aggregated value of the accounts exceeds $10,000. FinCEN’s potential amendment would apply the FBAR’s requirements to accounts holding cryptocurrency.
Finally, the Agenda confirms the stated intent of the IRS – and in particular, IRS Criminal Investigation – to focus its compliance and enforcement resources on cryptocurrency, and continue to hone its ability to trace cryptocurrency assets and penetrate, when necessary, the dark web.