Is Crypto Subject to New IRS §6050I Reporting?

Zac McClure
ByZac McClure, MBAReviewed byAlex MilesUpdated on December 26, 2024 · minute read
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  • The expansion of IRS §6050I to cryptocurrency transactions over $10,000 introduces new compliance requirements but remains uncertain as the IRS has yet to provide complete guidance on enforcement.

  • To prepare for potential reporting obligations, crypto users should keep detailed records of transactions and seek professional advice while staying informed about updates from the IRS regarding implementation and penalties. Consult a crypto tax professional like ours at TokenTax for guidance when in doubt.

Understanding the IRS §6050I reporting requirement

The IRS has expanded §6050I, initially designed for cash transactions, to include digital assets. This change obligates businesses and individuals to report crypto transactions exceeding $10,000 to prevent illicit activity and increase transparency. As a result, cryptocurrency is now subject to similar reporting standards as traditional cash transactions despite its unique technical and privacy challenges.

Reporting under §6050I requires disclosing detailed transaction information such as the amount, date, and identities of the parties involved. These updates were introduced through the Infrastructure Investment and Jobs Act of 2021. While the law intends to combat money laundering, its application to cryptocurrencies raises significant concerns about enforcement and its implications for decentralized finance platforms.

What is §6050I?

Section 6050I of the Internal Revenue Code was established in 1984 as part of broader anti-money laundering efforts. Initially, the rule applied to cash transactions over $10,000 and required businesses to report these transactions to the IRS within 15 days.

The passage of the Infrastructure Investment and Jobs Act expanded the scope of §6050I to include digital assets, fundamentally altering how these transactions are reported. This extension positions cryptocurrency transactions under the same scrutiny as cash, marking a significant regulatory shift for the industry.

Who needs to report under §6050I?

The rule targets individuals and entities engaging in what the IRS defines as "trade or business" activities. This includes professional traders, miners, businesses accepting crypto payments, and even individuals participating in specific high-value transactions.

The IRS’ broad definition of "trade or business" means that many in the crypto ecosystem must closely evaluate their reporting obligations. For example, a company paying contractors in cryptocurrency or a professional trader regularly engaging in high-value transactions may need to comply with §6050I.

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Requirements for reporting

Those subject to §6050I must disclose detailed information about transactions exceeding $10,000. This includes:

  • The amount and date of the transaction.

  • The identities of all parties involved.

  • The purpose of the transaction and any relevant documentation.

Reports must be submitted to the IRS within 15 days of the transaction, a tight timeline that could challenge decentralized networks and pseudonymous platforms like DeFi. Compliance demands precise record-keeping and complete transparency, which may conflict with the decentralized nature of crypto.

Learn more in our DeFi tax guide.

Specific scenarios and their tax implications for crypto

The §6050I reporting requirement applies to various crypto-related activities, many of which face unique compliance challenges. Below are examples of how these rules impact different scenarios in the crypto ecosystem:

  • Decentralized finance (DeFi): Many DeFi platforms operate pseudonymously, making it difficult for users to identify transaction parties. This raises questions about how users and platforms can comply with IRS reporting requirements. Without clear guidance, users risk penalties if they cannot provide sufficient information.

  • DAO contributors and airdrop farmers: Individuals who earn income by contributing to DAOs or participating in airdrop farming may face reporting requirements. The IRS might classify these activities as a trade or business, mainly if they generate significant income and are conducted systematically. Learn more about crypto taxes for DAOs.

  • Stakers and yield farmers: Those participating in staking crypto or yield farming must carefully assess whether their earnings exceed $10,000 per transaction. Compliance will likely require detailed record-keeping and timely reporting for professional staking operations.

Legal challenges and industry reactions

Expanding §6050I to digital assets has met with legal pushback, with concerns about privacy, constitutionality, and practicality.

Coin Center's challenge to IRS §6050I

Coin Center, a leading crypto policy group, has challenged the rule’s expansion in court, arguing that it violates constitutional protections. The Center has asserted that the rule imposes unreasonable compliance burdens, particularly for decentralized transactions where identifying all parties may be impossible. This legal challenge underscores the broader conflict between government oversight and the decentralized ethos of cryptocurrency.

Community and expert opinions

Crypto and tax experts have raised concerns about the lack of guidance from the IRS. Many believe the rule’s broad application may discourage innovation and participation in the crypto ecosystem. Other crypto users worry about the privacy implications, as disclosing transaction details could undermine the pseudonymity that attracts users to crypto.

Navigating compliance and avoiding penalties

While enforcing §6050I for digital assets depends on further regulatory clarification, preparation is critical to ensure compliance. Here are key steps to consider:

  • Maintain comprehensive records: Keep detailed records of transaction amounts, dates, and parties involved. Thorough documentation can help demonstrate compliance in case of an audit.

  • Stay informed: Monitor IRS announcements for updates on digital asset reporting requirements. Changes to §6050I enforcement could occur at any time.

  • Seek professional advice: Consult crypto tax experts to understand your obligations and develop a compliance strategy tailored to your activities.

By staying prepared and informed, crypto users and businesses can minimize risks and ensure they meet future regulatory standards.

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Crypto IRS §6050I reporting FAQs

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Zac McClure
Zac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.
Alex Miles
Reviewed byAlex MilesCo-Founder at TokenTax
Prior to TokenTax, Alex worked as a Product Designer at Dropbox and before that Readmill (acquired by Dropbox). He holds a BS in Digital Information Design - Interactive Media from Winthrop University.

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