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Sec. 6050I Crypto Crackdown (Part 2): 15 Days or Felony? $250K Fines

crypto regulations crypto tax Feb 22, 2024

6050I conundrum and the unique challenges of reporting digital assets

In Sec. 6050I Crypto Crackdown Part 1, we discussed the insanity of Form 8300 and the severe penalties for non-compliance. Here we'll continue with why it's so challenging to fit crypto into the narrow inflexibility of Form 8300.

Identifying counter parties is a key component of filing Form 8300. The U.S. Treasury wants to know the two parties (or more) in the transaction and how much was transacted. Digital assets are sent to one-way, deposit-only public addresses. This means people can receive funds without knowing who sent the funds. The innovative nature of blockchains and smart contracts also means you can interact with a blockchain that is NOT an individual or company; hence, there is NO counter party information available.

Examples of unreportable digital asset/crypto transactions
  • Airdrops (the free crypto from project participation)
  • Chain-split coins (although infrequent, think Bitcoin Cash and Ethereum Classic)
  • Staking rewards (PoS, proof of stake, validator or delegations to validators)
  • Mining rewards (PoW, proof of work mining)
  • Other DeFi and protocol rewards

Ether (ETH) staking rewards come from the Ethereum Blockchain which is not a company, doesn’t have a CEO, employees or an office. Yet Form 8300 states:

‘Part I: Identity of Individual From Whom the Cash Was Received’, which assumes “cash” has to be received from an individual because the physical management of cash is done by a person. The Ethereum Blockchain is not a person or a company, but the name is the only data point that can be listed on the form. Perhaps for date of birth you could list July 30, 2015, the date of the Ethereum genesis block.

In another example, XYZ Corp. provides digital asset infrastructure and therefore has significant digital assets on its balance sheet. XYZ receives airdropped tokens from unknown parties because it has many public addresses on multiple blockchains. There was no exchange of goods and services in the traditional sense and it’s a far cry from the guy trying to buy a used car for $12,500 in cash. Hopefully, the IRS will define a narrow range of reporting; otherwise, taxpayers will be stuck with impossible reporting and be set up for guaranteed failure.

Key Takeaway

Requiring digital assets on Form 8300 is another case of impossible reporting. Public blockchains don’t have an EIN# or SSN#, a date of birth or an address. Form 8300 has to be revamped so it’s consistent with digital asset transactions. Otherwise, many types of transactions can’t be reported on a form that does not reflect the technology.

The IRS is in the process of revamping Form 8300 and related instructions, but the question is whether the new version will accommodate all the nuances of digital assets.

The AICPA sent Comments on Virtual Currency Reporting under Internal Revenue Code Section 6045 and Section 6050I, and the Form 8300 and Instructions to the IRS addressing many of the reporting challenges of 6050I.

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Who is a trade or business for purposes of Form 8300? 

Remember, the Form 8300 is filed when, “Each person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash…”

Key Takeaway

Form 8300 is only filed by persons engaged in a trade or business. The question in crypto is whether investing in crypto constitutes a trade or business. If it does, then everyone in crypto is subject to 6050I. We need the IRS to clarify.

The terms “trade” or “business” is not clearly defined anywhere in the code so its meaning has been indirectly derived through case law. As a result, it’s not clear whether investing activity is trade or business activity.

In addition, investors who reach trader status are allowed to deduct ordinary and necessary business expenses unavailable to the investor. Traders are also not defined in the code, so it’s another facts-and-circumstances, subjective-based test. The IRS also needs to clarify whether trader status is considered a trade or business for purposes of 6050I. 

6050I logic and crypto: Digital assets are another medium of exchange

The logic behind 6050I and Form 8300 for cash reporting is to “catch” transactions that would otherwise not get captured in the traditional banking and financial system. Cash could circulate in a parallel secondary economy and never cross wires with the banking system. The only way to capture cash transactions is to force people to disclose or face severe financial and criminal penalties. The assumption is anyone who uses more than $10,000 in cash must be a bad actor who is trying to launder illegally obtained cash. While that could be the case, it’s also more likely the business receiving the cash doesn’t report some or all the cash received as income.

It takes effort to manage large amounts of cash and you must be concerned for your personal safety. Cash transactions are also physical in person transactions; therefore, the number of greater than $10,000 transactions is relatively small and infrequent.

Electronic cash, debit cards and online commerce proliferate in the world of financial transactions. In addition, many businesses are going “cashless” and won’t accept cash from customers. From a business perspective, managing lots of cash is an expensive, high-risk game for many reasons, including fraud and embezzlement. The total cost of accepting cash is greater than credit cards fees and I would never advise a business to use cash for these and many other reasons.

Nonetheless, digital assets including stablecoins like USDC, TUSD and USDT are a USD equivalent proxy for the electronic USD “cash” in your bank account. Whether it’s stablecoins or other digital assets like Bitcoin and Ether, they all have a medium of exchange economic property. A USDC payment and a USD ACH payment are essentially the same thing, and they are far more closely related than transactions with 100-dollar bills. USDC transactions get recorded on a publicly transparent blockchain while a USD ACH transaction gets recorded on the bank’s internal ledger.

Key Takeaway

The transparency aspect alone should make USDC a far superior choice in the eyes of regulators and law enforcement because it’s the least hidden of the three methods albeit with pseudonymous identities (crypto, electronic USD or cash).

The Form 8300 requirement for digital assets is illogical 

If digital assets are treated as cash, then electronic USD (the USD in your bank account) should be treated as cash to pass the consistency test. Imagine a world where the same rules applied to all ecommerce and electronic USD transactions. That’s what you call a surveillance state!

This is essentially what the Infrastructure Act is doing because there’s an on-chain trajectory where all assets will get tokenized, including “electronic USD” to take advantage of the superior value proposition of blockchain technology. RWA, real world assets, is now a term to describe how physical assets are getting tokenized.

When the U.S. Federal Reserve adopts a CBDC or central bank digital currency, then all electronic USD becomes a digital asset overnight, and I can only wonder how many more billions of Forms 8300 would have to be filed as a result.

At this hypothetical point, the United States is just a smidge away from 100% financial surveillance because all they have to do is eliminate the $10,000 transaction threshold. The question is whether a CBDC would be considered a digital asset. Guess who gets to make that definition? The United States Government.

Key Takeaway

The original intention to get off-the-record cash transactions on the record is inconsistent with the nature of digital asset transactions. 6050I and Form 8300 are overly burdensome for the taxpayer and set the U.S. on a course towards financial surveillance.

The absence of rules of doesn’t create bad actors. Bad actors create themselves with the absence of a moral and ethical compass.

The temporary good news

Finally, there is some good news when the IRS issued IRS Announcement 2024-04 which deferred the Form 8300 reporting requirements until the final regulations are issued for the Infrastructure Act related to section 6050I. 

“Accordingly, until the Treasury Department and the IRS publish regulations under section 6050I to implement section 80603(b)(3) of the Infrastructure Act, persons…will not be required to include those digital assets when determining whether cash received has a value in excess of the $10,000 reporting threshold…”.

There is more to come as this unfolds.

Remember your goal is always to get a Crypto Bullseye™.

Yours in Crypto, 

Kirk David Phillips, CPA, CMA, CFE, CBP 

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