The IRS has announced that businesses do not have to report the receipt of digital assets as cash to FinCEN until the IRS issues final rules relating to the reporting requirements. The delay is imposed by US federal law, which requires a public comment period prior to implementing new regulations.
Under Code Sec. 6050I(a), any person engaged in a trade or business who receives cash in excess of $10,000 in one transaction (or two or more related transactions) must file an information return reporting the receipt of cash. Under certain conditions, (e.g. a bank withdrawal), paying out cash in excess of $10,000 must also be reported. Section 80603(b)(3) of the Infrastructure Investment and Jobs Act expanded the definition of the term “cash” to include any digital asset as defined in Code Sec. 6045(g)(3)(D), effective for years beginning after December 31, 2023. This requirement echoes rules imposed by the Bank Secrecy Act in 1970 for filing FinCEN Form 104, commonly known as a “Currency Transaction Report,” or “CTR.” The IRS collects CTRs (through the Financial Crimes Enforcement Network or FinCEN) and Suspicious Activity Reports (“SARs”) for the purpose of identifying and tracking money laundering, terrorist financing, tax evasion, and other violations of US laws.
The IRS published a Notice of Proposed Rulemaking on August 29, 2023, that includes language clarifying the definition of the term digital assets found in Code Sec. 6045(g)(3)(D). However, until the IRS publishes final regulations, reporting of digital asset receipts under the modified rules will not be required. The proposed rules will take effect later, after a public comment period and possible revisions. Note that this law does not modify any other existing law relating to classification, reporting, or taxation of digital assets.
Once implemented, the new rules are intended to reduce opportunities for stolen or unreported digital assets to be integrated into the stream of otherwise lawful commerce. However, data show that the reporting regime for large cash transactions and other “suspicious activity” has been less than effective in identifying criminals. According to FinCEN’s own records, only 15.8% of IRS investigations in fiscal year 2022 directly resulted from data submitted in the form of Suspicious Activity Reports and Currency Transaction Reports to FinCEN. The reasons for filing the vast majority of reports were similarly unremarkable, with suspected terrorist financing and human trafficking ranking only 70th and 63rd respectively on the list of reasons for filing Suspicious Activity Reports.