Generally , under the new rules , a client in a trade or business who receives more than $ 10,000 in cash in a single transaction or in related transactions has to electronically file an IRS Form 8300 , the agency says , adding that the reporting will help the IRS and the Treasury ’ s Financial Crimes Enforcement Network ( FinCEN ) fight money laundering . Part of the infrastructure bill signed by President Biden in 2021 , the requirement was to become effective as of this year and apply to digital assets and all varieties of businesses receiving payments from U . S . persons or entities . ( Religious exemptions and hardship waivers were available , the IRS added .)

The IRS has since issued transitional guidance postponing the requirement as the Treasury and the IRS implement the new provisions , and the departments will during that time be issuing regulations

before the rule goes into effect . Observers expect the requirement will eventually become effective .

“ Basically , transactions involving digital assets of $ 10,000 or more [ will have to ] be reported within 15 days ,” says Phil Drudy , lead managing director for CBIZ MHM ’ s New York tax department .

“ Clients that are active in digital assets are confused about what needs to be reported and when it needs to be reported , as are most professional advisors ,” he says . “ This is especially true when the digital assets are in a foreign account or environment .” He says there ’ s confusion about when or if rules under the Foreign Account Tax Compliance Act ( FATCA ) might apply — or the requirements of the Report of Foreign Bank and Financial Accounts . “ And , given the draconian penalties associated with these potential foreign filings , there is a heightened level of concern .”

“ Where it gets interesting is [ that ] the term ‘ trade or business ’ is broadly defined and subject to interpretation ,” writes Trevor Ward , a Salt Like City-area CPA , in his LinkedIn blog . “ The courts and IRS often look

at several factors to determine if any activity qualifies as a trade or business , including regularity and continuity of the activity ; intent to make a profit ; [ and ] level of activity .”

Other details the IRS uses to determine when something is a business include whether the activity is carried on in a businesslike manner with complete and accurate books ; the dependency of the taxpayer on the activity for his or her livelihood ; the profitability of a taxpayer ’ s similar activities in the past ; and the taxpayer ’ s expectation of future profit from the appreciation of assets .

Observers have added that most casual crypto investors in the U . S . do not have a “ trade or business ” for tax purposes and that becoming one — which some consider crypto-trader status — requires a special tax election with the IRS .

“ Retail traders typically aren ’ t seen as a trade or business ,” Ward adds , “ but things could get tricky if you trade frequently , run validator nodes , engage in staking [ earning rewards by pledging crypto holdings ] and so on .”

Crypto in general is figuring larger in IRS scrutiny of overseas assets and tax dodging .

“ Many [ clients ] are aware of the heightened scrutiny , but I ’ m not sure how well they understand the requirements ,” Drudy says .

Most casual crypto investors in the U . S . do not have a “ trade or business ” for tax purposes , and becoming a business would require a special tax election with the IRS .

Another source of confusion is whether crypto exchanges or those who receive cash payments from a crypto transaction via a third party might be subject to the filing rule . When exactly , Ward also asks , will a transaction with a digital asset be considered a trade or business transaction instead of an investment ?

“ I always tell clients that are invested or active in the digital asset environment that the rules are evolving and changing and that you need to revisit the issues regularly ,” Drudy says .

— Jeff Stimpson

JANUARY / FEBRUARY 2024 | FINANCIAL ADVISOR MAGAZINE | 15