With digital assets like cryptocurrency becoming increasingly mainstream, the IRS is ramping up efforts to ensure that businesses, including small businesses in Connecticut, properly report these transactions. Beginning in 2025, significant changes will impact how businesses handle digital asset reporting, especially as the IRS’s transitional safe harbor provision comes to an end in January. If your business engages in cryptocurrency or other digital asset transactions, it’s essential to understand how these changes will affect you and what you need to do to stay compliant.
What is Digital Asset Reporting?
Digital asset reporting refers to the IRS requirements for businesses to disclose their holdings and transactions involving cryptocurrencies and other digital assets. These new obligations stem from the Infrastructure Investment and Jobs Act (IIJA), signed into law in 2021, which expands reporting rules to include cryptocurrencies and mandates that brokers provide detailed information on crypto transactions.
For small businesses, this means any involvement in digital asset transactions, whether for payments, investments, or exchanges, must now be reported to the IRS using a process similar to traditional financial reporting. The IRS is widening its definition of “brokers” to include entities that facilitate these transactions, meaning small business owners who deal with digital assets will need to comply with new rules.
What Happens When the Safe Harbor Ends?
The IRS has provided a safe harbor for digital asset reporting since the IIJA passed, giving businesses time to adjust to the new regulations. Under the safe harbor, businesses weren’t penalized for underreporting digital asset transactions, as long as they made a reasonable effort to comply with the rules.
However, the safe harbor expires on January 1, 2025. After this date, businesses will no longer have leniency, and the IRS will enforce stricter reporting standards. Any failure to meet these standards could result in audits, penalties, or fines.
Key Changes
- More Stringent Reporting: Businesses must report all cryptocurrency transactions to the IRS, including those involving payments for services or investments. Reporting forms will also change, with the IRS introducing the Form 1099-DA to document digital asset transactions.
- Wider Definition of Digital Assets: The IRS is expanding its definition of digital assets beyond just cryptocurrencies to include non-fungible tokens (NFTs) and other forms of digital assets. This means that any business engaged in transactions involving these types of assets must account for them in their IRS filings.
- Increased Penalties for Non-Compliance: With the end of the safe harbor, businesses that fail to properly report digital asset transactions may face serious consequences, including penalties and potential audits.
What Small Businesses Should Do to Prepare
Small businesses that accept cryptocurrency or are involved in any digital asset transactions should act now to ensure they’re prepared for the January deadline. Here are some steps you can take to stay compliant:
- Review Your Current Processes: Evaluate how your business handles digital asset transactions, whether they’re related to payments, investments, or exchanges, and ensure these are properly documented.
- Upgrade Financial Tracking Systems: Make sure your accounting software can track digital asset transactions accurately and in line with IRS reporting requirements.
- Stay Informed: Tax regulations are constantly evolving, particularly in the area of digital assets. Be sure to stay up to date on any further guidance from the IRS as the deadline approaches.
As cryptocurrencies and other digital assets become increasingly common, it’s crucial for small businesses to understand how the IRS’s new reporting requirements will affect them. For small business owners in Connecticut, this is an excellent opportunity to review how digital assets fit into your financial strategy and make sure you’re ready for these new reporting obligations. Given the complexities involved in digital asset reporting, consulting with us is critical if you use them. Reach out to us to set up a call to discuss any questions you may have.