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Too Much of a Good Thing: IRS Expects Eight (8) Billion Filings under New Digital Asset Reporting

By Anthony P. Daddino on Oct. 30. 2023
The IRS is testing the limits of the law of diminishing returns with the new digital asset reporting regime, announcing that it expects to receive eight (8) billion filings per year. Yes, billion with a “B”.

As background, the Infrastructure Investment Act of 2021 enacted new information reporting requirements that apply to digital asset transactions. Originally set to take effect in 2024, the IRS recently issued proposed regulations that brought both interpretative guidance as well as a delayed effective date. The proposed regulations would require “brokers” to report gross proceeds, cost basis, and gain or loss on sales and exchanges of digital assets, including cryptocurrency, stablecoins, and non-fungible tokens (NFTs), by way of a new form, a Form 1099-DA. Proceeds from digital asset transactions would need to be reported starting in 2026 for sales occurring during 2025, and cost basis and gain or loss reporting for digital asset transactions would need to be reported starting in 2027, for sales occurring in 2026. The term broker includes cryptocurrency exchanges (such as Coinbase), as well as digital asset payment processors as well as and any person that regularly redeems digital assets they created or issued. Even real estate brokers are at risk, as they must report transactions where digital assets are used to purchase property. At the relief of many, the IRS has excluded miners and stakers from the definition of broker.

Even after the ‘narrowing’ of the scope of the reporting rules by the proposed regulations, the IRS announced last week that it is still estimating 8 billion information returns each year once the rules take effect. The IRS admitted that its systems can not support such data and volume, but the IRS is hopeful that system upgrades may be done in time thanks to funding from the Inflation Reduction Act.

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. While I don’t presume to know the optimal level of Form 1099-DA returns, I feel confident saying that eight (8) billion is way past the tipping point, and such volume risks cannibalizing the intel that the IRS could otherwise receive from the new reporting rules.

If you have any questions about this blog post, cryptocurrency, or any other tax-related topic, feel free to contact me at (214) 749-2464 or adaddino@meadowscollier.com.