Because of new IRS regulations that went into effect on January 1, traders are increasingly concerned about whether their actions could land them in legal hot water.
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When businesses or professional traders obtain cryptocurrency valued at more than $10,000, they must notify the Internal Revenue Service of their transactions.
Those who disobey may be charged with felonies.
The Infrastructure Investment and Jobs Act, Section 6050I, was first passed by Congress in November 2021 and included this reporting requirement, which went into effect on January 1.
The IRS hasn’t provided much direction or explanation on who is genuinely required to report, despite the possibility of facing legal ramifications.
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Due to the lack of a physical location or social security number, traders employing decentralized financial protocols—amateur and professional alike—have expressed stresses about whether or not they are subject to the law.
Blockworks was informed by Shehan Chandrasekera, CoinTracker’s head of tax strategy, that 6050I applies to anybody who engage in “trade or business.” These people could be individuals or businesses.
“To put it simply, they have to conduct business as usual when conducting any kind of activity,” Chandrasekera stated. “You don’t have a trade or business if you are a simple investor in cryptocurrencies, which is the case for most US users. Consequently, 6050I has no effect on you.
To ascertain whether a DAO contributor qualifies as a “trade or business,” some inquiries to take into account would be:
- Is contributing to the DAO your full-time, self-employed job?
- Is this your main source of income?
- Do you do this full-time throughout the year?
“You run a “trade or business” and may be subject to 6050I if the answer to all of the above questions is “yes” (there may be additional qualitative questions depending on the situation),” Chandrasekera stated.
Airdrop farmers, for instance, can be justified using a similar reasoning. A person receiving a one-time airdrop allocation is probably not subject to reporting responsibilities, but those who farm airdrops as their full-time job are probably subject to reporting requirements.
Regarding stakeholders, Chandrasekera clarifies that those who are stakeholder on large exchanges and get incentives but have another primary source of income would probably not have to file an IRS report. However, there will be reporting obligations for an individual or group who manages a professional staking pool and receives commission payments.
Nevertheless, according to Cameron Browne, a certified public accountant (CPA) and partner at Darien Advisors, a Web3 crypto tax advising business, the specifics of how traders and individuals engage in staking may also have an impact on whether they are required to disclose, as per Blockworks.
“Maybe if they’re trading via an organization and assert $10K in yield farming rewards. Not if they’re just dealing as individuals, according to Browne. “That would definitely subject a few of my clients who trade through partnerships, corporations, or S corporations.”
The IRS has not yet provided clarification on what counts as trade or business activity and what does not.
“There are links between this arbitrary standard and a great deal of other provisions in the IRS code. This has been made clearer for case-related facts in a few court instances. However, there isn’t a clear-cut guideline, according to Chandrasekera.
The lack of clarity has prompted the cryptocurrency think tank Coin Center to take action on their own. Coin Center filed a lawsuit against the US Treasury Department in June 2022, claiming the IRS restrictions are illegal.
It will be evident how difficult this need is when someone donates in this way, but does so anonymously by sending us [ether or bitcoin] to our public addresses. In that scenario, who could we possible list as the sender? The Treasury Department has not yet responded to any of these inquiries, according to a blog post by Coin Center executive director Jerry Brito.
In the meanwhile, as they figure out how to remain compliant, Brito says, the Coin Center team will keep fighting the law in court.
According to Chandrasekera, many taxpayers outside of the cryptocurrency industry would rather be treated as a trade or business since it allows them to deduct business-related expenses—a benefit that is not extended to what the IRS considers to be “hobbies.”
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