Form 1099-K reporting
The American Rescue Plan Act of 2021 reduced the threshold for Form 1099-K reporting by third-party settlement organizations (TPSOs), like payment applications and online marketplaces, to $600 or more, regardless of the number of transactions involved. The new provision is effective for payments made on or after Jan. 1, 2022. Prior to that date, TPSOs had to report payments only if during the calendar year the payee received more than $20,000 and there were more than 200 transactions with that payee. This change would mean that many more taxpayers, including individuals who use popular payment and marketplace applications, would receive Form 1099-Ks. Reporting under the lower threshold was set to begin in 2023.
Crowe observation
Understanding what the amount reported on a Form 1099-K represents could be confusing to many taxpayers, potentially resulting in misreporting of income on tax returns and questions from the IRS when the Form 1099-Ks are matched against the income reported on returns filed. Resolving these issues could be complicated by the difficulties taxpayers have had contacting the IRS.
Notice 2023-10 states that the lower reporting threshold will remain in effect but that no penalties will be imposed for TPSOs that follow the prior requirements. Therefore, TPSOs will not be required to report 2022 transactions on a Form 1099-K based on the $600 threshold. However, this delay does not have any impact on a payee’s obligation (which is unchanged by the lowering of the reporting threshold) to properly report income with respect to payments received from a TPSO. The IRS also updated the FAQ about Form 1099-K.
Broker reporting for digital assets
The Infrastructure Investment and Jobs Act enacted new broker reporting requirements for virtual currency and other digital assets under IRC Section 6045 and Section 6045A. The act broadly defines digital asset to mean “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”
IRC Section 6045 generally requires each person doing business as a broker to file and furnish information returns (Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions”) to report information about each customer, gross proceeds, and other details as required by regulations. In addition, IRC Section 6045A generally requires transfer reporting, whereby brokers that transfer specified securities provide a transfer statement to the receiving broker.
Digital asset broker reporting was set to begin for transactions occurring in 2023 that would have been required to be reported in 2024. However, digital asset broker reporting regulations were not published in 2022. Without this needed guidance, timely compliance with the new reporting requirement was in doubt.
As with all new information reporting and withholding requirements, significant time is required to put processes in place to identify reportable transactions, collect necessary information from payees, and implement reporting and compliance procedures. Taxpayers anxiously are awaiting guidance on who will be subject to the new digital asset broker reporting requirements, what type of transactions will be subject to reporting, what information will be required to be reported, and other details.
To alleviate uncertainty, Announcement 2023-02 provides transition relief and delays digital asset broker reporting until final regulations are issued. IRS News Release 2022-227 clarifies that taxpayers still are required to report any income they receive from transactions involving digital assets.
IRIS
To use the IRIS system, filers must apply to obtain a unique filing identifier, a transmitter control code (TCC), even if they already have a TCC for the legacy information reporting filing system. Thresholds for required electronic filing are anticipated to be lowered soon, which means that many more filers will be required to electronically file information returns. Online filing through IRIS should make it easier for taxpayers to electronically file these returns.
Looking ahead
Generally, filers and payees need significant lead time to understand and comply with new information reporting requirements. In the case of both the Form 1099-K lower reporting threshold and digital asset broker reporting, Treasury and the IRS correctly determined that more time was needed to provide guidance and to acclimate taxpayers to how the new information reporting requirements would affect them.
Crowe observation
During the delay in the implementation of these rules, it is possible that Congress might heed the call of taxpayers to modify the new rules. In the case of Form 1099-K, there is a hope that Congress will repeal the new rule or raise the threshold. In the case of digital asset broker reporting, there are calls to clarify the rules in a number of ways, including by narrowing the scope of the transactions covered.
In the meantime, filers should consider how the new information reporting requirements might affect them and evaluate their systems and processes to identify potential changes that could be needed in order to comply. Taxpayers also should consider whether to apply for a TCC to electronically file information returns through the IRS’ online portal. Taxpayers who remain uncertain or have questions concerning their upcoming filing requirements should consult with their tax advisers to be ready to comply with their information reporting and withholding obligations.
