Crypto tax policy continues to move forward, domestically and internationally. Domestically, the IRS seeks comments on the new Form 1099-DA. Internationally, the Organization for Economic Co-Operation and Development (“OECD”) provided updates on its Crypto-Asset Reporting Framework, and a group of criminal tax investors convened to discuss global tax enforcement efforts.
Legal Token: Form 1099-DA
As discussed in our memorandum on the recently finalized broker reporting rules, the IRS has published a draft of new Form 1099-DA, which crypto exchanges, certain token issuers and certain other counterparties will use to report gross proceeds from the purchase and sale of digital assets beginning in 2025. Beginning in 2026, reporting will also include cost basis for certain transactions. While the intent of this reporting is to provide clarity and help taxpayers to properly report their gains and income from crypto investments, it will also lead to greater data available to the IRS to identify underreporting and non-reporting of income. This in turn will lead to more IRS enforcement activity.
Legal Token: Crypto-Asset Reporting Framework
In addition to US crypto exchanges having to implement new IRS reporting obligations, offshore digital asset firms may have owner reporting obligations. The Common Reporting Standard (the “CRS”), a global standard that requires financial institutions to automatically exchange financial account information with tax authorities to help prevent tax evasion developed by the OECD, requires certain financial institutions to gather information and report to local tax authorities regarding beneficial owners in participating jurisdictions. Note that the United States does not participate in the Common Reporting Standard, but reporting on US beneficial owners may be required pursuant to FATCA.
Until last year, digital assets were excluded from CRS obligations. In 2023, the OECD published the Crypto-Asset Reporting Framework (“CARF”), which is a set of model rules regarding the inclusion of digital assets, the entities and individuals subject to data collection and reporting requirements, the transactions subject to reporting, as well as the information to be reported in respect of such transactions, and the due diligence procedures to identify “crypto-asset users” and to determine the relevant tax jurisdictions for reporting and exchange purposes. These model rules under CARF are implemented locally in each participating CRS jurisdiction.
Recently, the CARF has been updated with technical reporting guidance. This guidance pertains to the XML schema that should be used to report information to the competent tax authorities. Non-US financial institutions that invest in or trade or provide exchange services for digital asset covered by CARF should review their due diligence and reporting obligations.
Legal Token: Global Enforcement Activities
Criminal tax investigators from the United States, Canada, the United Kingdom, Australia and the Netherlands (the “J5”) recently convened to uncover cross-border tax crimes and generate leads for each respective country to investigate domestically. The J5’s criminal enforcement mandate is not limited to blockchain and cryptocurrency, but crypto, like fiat currency, can be used to conduct criminal activities.
Representatives from the J5 tax authorities announced that each respective tax authority will prepare advisory guidance on for over-the-counter cryptocurrency trading desks, cryptocurrency payment solutions providers, and other cryptocurrency transaction participants to better identify criminal activity.
The J5 already identified several risk indicators that may be indicative of money laundering, cybercrime, tax evasion, and other illicit activities. These include: (i) layering transactions to obscure the origin of funds; (ii) sourcing funds in jurisdictions with weak regulatory frameworks; (iii) transactions involving high-risk or anonymous counterparties; and (iv) unusual transactions, particularly from newly established accounts. We expect the forthcoming guidance to build out these risk indicators.
In the United States, the IRS was earmarked $80 billion in funding and announced 3x-10x increases in audits of high net worth taxpayers and investment entities as part of its strategic operating plan. Given the expected enforcement guidance, information reporting data and the IRS’s increased funding, we expect more civil tax audits and criminal tax investigations.
For further information about legal developments in the blockchain space, please contact a member of Seward & Kissel’s Blockchain Practice.