Digital Assets Reporting Requirements Under Section 6050I

By: Matthew E. Foreman, Esq., LL.M., Moish E. Peltz, Esq., and Christopher Rivera

On January 16, 2024, the Treasury Department and Internal Revenue Service (“IRS”) announced that the agencies are postponing the implementation of increased reporting requirements for digital asset transactions under the recently amended Section 6050I of the Internal Revenue Code (“IRC”).[1] This interim measure will remain in effect until further regulations are developed and issued by both the Treasury and the IRS.[2] However, as these increased reporting requirements approach, businesses and certain individuals should become ready to comply.

What is Section 6050I?

Previously, Section 6050I required any person engaged in a trade or business who received at least $10,000 in cash, whether in U.S. dollars or a foreign currency, to report the transaction to FinCEN using IRS Form 8300. The Infrastructure Investments and Jobs Act of 2021 amended IRC 6050I by classifying certain digital asset transactions as subject to the same reporting requirements as cash.[3] Reporting is mandatory even if the $10,000 threshold is met over a series of related transactions instead of a single occurrence, i.e., breaking a transaction into multiple parts will not avoid the reporting requirement.[4] The purpose of this expanded definition is to strengthen the government’s ability to track substantial digital asset transactions that could otherwise mask illicit financial activity.

Does Section 6050I Apply to My Business?

The new reporting requirements apply if a transaction relates to trade or business activity.[5] For a transaction to constitute trade or business activity under Section 6050I, business activities must be done with continuity and regularity for the primary purpose of generating income or profit. This encompasses most actions taken by individuals or entities such as companies, partnerships, or sole proprietors who engage in commercial activities. However, the determination of whether a specific activity qualifies as trade or business depends on the facts and circumstances, not merely the presence of a profit motive.

For instance, if you regularly buy and sell NFTs for $10,000 or more with the objective of generating profit, such activities may be deemed a business transaction under Section 6050I.[6] On the other hand, an individual who purchases an NFT for $10,000 or more in a one-off sale would be unlikely be required to report the transaction because purchasing a single NFT is not a business, thereby falling outside of the scope of Section 6050I’s reporting requirements.

Thus, in determining whether Section 6050I applies, it is important to analyze whether your transactions would be considered trade or business activity.

How do I Comply with Section 6050I?      

If you conduct transactions subject to Section 6050I, you will need to file IRS Form 8300 with FinCEN to comply with the new reporting obligations.[7] As applied to traditional cash transactions, Form 8300 filing is required when any individual or business receives over $10,000 in cash for one transaction or a series of related transactions. This requirement is part of a broad effort to trace large sums of money that might be linked to illicit activities. Form 8300 also has a preventive function by acting as deterrent to those who might consider engaging in transactions designed to evade taxes or launder money.

Filing a Form 8300 requires the provision of specific details about the transaction, including the identities of the person or business on whose behalf the transaction was conducted and the person or business from whom the cash was received. The amount of cash involved, the date of execution, and the nature of the transaction must be disclosed. The form must be filed within 15 days from when the transaction occurred.[8] Lastly, filers must provide a written statement to each person or business named in the reported transaction by January 31 of the following year.[9] For example, if you filed Form 8300 on April 15, 2023, you would need to provide the written statements by January 31, 2024.

While Form 8300 has been traditionally used for cash transactions, its application to digital assets follows the general trend of legislation and Treasury regulations increasing disclosure in the digital asset space. As Form 8300 does not currently contemplate digital asset transactions, we anticipate that additional regulations published by the Treasury Department and IRS will provide more specific information on how to report digital asset transactions.

What Can Your Business do to Prepare for Compliance?

Digital assets have been historically challenging for regulatory bodies to track due to their decentralized and often pseudonymous nature. As regulations coalesce over this new asset class, businesses will need to adapt to ensure they meet their compliance obligations.

There are numerous measures that can be taken to help ease into compliance. First, businesses should begin by auditing their current financial systems to ensure that they can accurately track and record all digital asset transactions that meet the $10,000 threshold. This may include reviewing transactions such as cryptocurrency payments, digital asset investments, or aggregate token trades surpassing the $10,000 mark, or the accumulation of NFT sales reaching the threshold. If your business is unable to effectively monitor these transactions, we recommend implementing a system with these capabilities.

Furthermore, businesses should establish policies that make it clear when a transaction needs to be reported. This may require instituting company training that educates employees about the nuances of digital asset transactions and how to recognize the types of activities that need to be reported. Such preparation will not only familiarize the staff with the procedural aspects of compliance but also with the legal implications of these transactions, thereby fostering a culture of adherence to regulatory requirements before they become enforceable.

Lastly, it is important that your business stays informed about new regulations issued by the Treasury Department and IRS, particularly the regulations released last year that aim to expand the definition of broker and clarify withholding requirements (see: https://frblaw.com/proposed-regulations-digital-asset-reporting-withholding/). Having an early understanding of new regulations and what they require is essential to providing your business with an adequate amount of time to prepare.

Businesses should also review and consider the Treasury Department and IRS’s proposed regulations, once those new regulations are published, which we anticipate will address the application of Section 6050I to digital assets, including the provision of related forms and instructions.

Conclusion

Falcon Rappaport & Berkman LLP is dedicated to serving clients in the digital asset space. Our Emerging Technologies & Blockchain Practice Group focuses on keeping clients ahead with the latest laws and regulations. If you are unsure as to whether Section 6050I applies to your business, or you need assistance in preparing for compliance, we encourage you to contact us to speak with our team of experienced attorneys.

[1] IRS Announcement 2024-4 (accessible at https://www.irs.gov/pub/irs-drop/a-24-04.pdf)

[2] Id.

[3] I.R.C. § 6050I(d)(3)

[4] I.R.C. § 6050I(a)(2)

[5] I.R.C. § 6050I(a)(1)

[6] Determining whether a profit-seeking activity is a trade or business is fact-specific, with the seminal case being Comm’r v. Groetzinger, 480 U.S. 23 (1987).

[7] IR-2024-12 (accessible at https://www.irs.gov/newsroom/treasury-and-irs-announce-that-businesses-do-not-have-to-report-certain-transactions-involving-digital-assets-until-regulations-are-issued#:~:text=WASHINGTON%20%E2%80%94%20The%20Treasury%20Department%20and,Treasury%20and%20IRS%20issue%20regulations)

[8] IRS Form 8300 (accessible at https://www.irs.gov/pub/irs-pdf/f8300.pdf)

[9] IRS Guidance for Form 8300 (accessible at https://www.irs.gov/businesses/small-businesses-self-employed/form-8300-and-reporting-cash-payments-of-over-10000#:~:text=You%20must%20file%20Form%208300%20within%2015%20days%20after%20the,year%20following%20the%20reportable%20transaction)

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.