Last month, the Department of the Treasury published its Fiscal Year 2022 Revenue Proposals (The Proposals) which impact U.S. federal tax information reporting and crypto brokers. Here is how!
Attention all crypto brokers! The United States is cracking down on taxpayers concealing assets and taxable income by using offshore crypto exchanges, wallet providers, and hiding behind other entities. The Proposals are looking to third party information reporting for help in identifying these taxpayers and increasing voluntary tax compliance. With all of the global efforts to increase tax transparency over the last decade, the United States is well situated to enhance its relationships partner jurisdictions. Using reciprocity, the United States intends to provide information on non-U.S. beneficial owners of certain entities transacting in crypto assets with U.S. brokers. This means that brokers who report on crypto assets would have to include reporting on certain beneficial owners of entities holding accounts with that broker, so that the United States could exchange this information with their partner jurisdictions. In return, the partner jurisdictions would provide the same information with respect to U.S. taxpayers.
Who is impacted? Brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers.
What is required? Report information relating to certain passive entities and their substantial non-U.S. owners when reporting crypto assets held by these entities in an account with the broker. Also, brokers report gross proceeds and other required information with respect to the sales of crypto assets with respect to customers and for certain passive entities, their substantial non-U.S. owners.
Effective Date: This proposal would be effective for returns required to be filed after December 31, 2022.
Enhancing tax information reporting compliance again! In looking to enhance compliance and modernize tax administration the Proposals intend to expand electronic filing to enhance the IRS ability to target its audit activity and allow the Secretary broader authority to require electronic filing.
Who is impacted? Taxpayers reporting larger amounts that are complex business entities, including:
- Income tax returns of individuals with gross income of $400,000 or more
- Income, estate, or gift tax returns of all related individuals, estates, and trusts with assets of gross income over $400,000 or more in any of the three preceding years
- Partnership returns for partnerships with assets or any item of income of more than $10 million in any of the three preceding years
- Partnership returns for partnerships with more than 10 partners
- Returns of REITs, REMIVs, RICs, and all insurance companies, and
- Corporate returns for corporations with $10m or more in asset s or more than 10 shareholders
What is required? Electronic filing required for the following:
- Forms 8918, “Material Advisor Disclosure Statement”
- Forms 8886, “Reportable Transaction Disclosure Statement”
- Forms 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”
- Forms 8038-CP, “Return for Credit Payments to Issuers of Qualified Bonds,” and
- Forms 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business”
- Return preparers that expect to prepare more than ten corporation income tax returns or partnership returns
Effective Date: The proposal would be effective for payments made after December 31, 2021.
Backup withholding, again! The Proposals seek to treat all income subject to backup withholding the same, which would allow the IRS to require payees of any reportable payments to furnish their TINs to payors under penalty of perjury. This means that the manner required for providing a TIN for all reportable payments would require a Form W-9 or equivalent. The proposal would be effective for payments made after December 31, 2021.
New financial account information reporting regime! Since the only information reported of gross receipts is limited to Forms 1099-MISC, 1099-NEC, and 1099-K, there is no information reporting on total deductible expenses or other types of gross receipts. The Proposals seek to create a comprehensive information reporting regime. This means that financial institutions would report data on financial accounts in an information return. The annual return will report gross inflows and outflows with a breakdown for each physical cash transactions with a non-U.S. account, and transfers to and from another account with the same owner. This will help increase visibility of gross receipts and deductible expenses to the IRS.
Who is impacted? All business and personal accounts from financial institutions, including bank, loan, and investment accounts, with the exception of accounts below a low de minimis gross flow threshold of $600 or fair market value of $600. This includes other financial accounts with similar characteristics.
What is required? Payment settlement entities would collect TINs and file revised Forms 1099-K expanded to all payee accounts, subject to the same de minimis threshold, reporting not only gross receipts but also gross purchase, physical cash, and payments to and from non-U.S. accounts, and transfer inflows and outflows. Similar reporting requirements would apply to crypto asset exchanges and custodians. Separately, reporting requirements would apply in cases in which taxpayers buy crypto assets from one broker and then transfer the crypt assets to another broker, and businesses that receive crypto assets in transactions with a fair market value of more than $10,000 would have to report these transactions.
Effective Date: The proposal would be effective for tax years beginning after December 31, 2022.
Please see the full set of proposals at: https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf
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