Under Internal Revenue Code Section 6050I, anyone who is “engaged in a trade or business” and “receives in such transactions more than $10,000 in cash in a single transaction (or two or more related transactions)” must: File a request with FinCEN. . Form 8300 to report transactions.
IRC Section 6050I(d) states that “cash” includes foreign currency and “certain monetary instruments.” The Infrastructure Investment and Jobs Act of 2021 expands the definition of money to include digital assets defined in IRC section 6045(g)(3)(D):
“Unless the Minister specifies otherwise, the term ‘digital asset’ means any digital representation of value recorded on a distributed ledger and secured using cryptography or similar technology, as defined by the Minister.”
These new legal provisions came into force on January 1, 2024 and have sparked an outcry on social media among digital asset investors and traders.
Form 8300
The purpose of Form 8300 is to report large cash transactions to prevent money laundering. For example, auto dealers must use Form 8300 to report transactions in which a customer pays more than $10,000 in cash for a vehicle. In other words, if you walk into your local dealership with a suitcase full of cash and want to trade it in for a new G-Wagen, have some extra paperwork ready.
According to the instructions on the form:
“Any person who is engaged in a trade or business and receives from such trade or business more than $10,000 in cash in a single transaction or in two or more related transactions must file Form 8300.”
"Cash". The term “cash” means the following: • U.S. and foreign coins and coins received as a result of a transaction; or • Cashier's checks, money orders, cashier's checks, or traveler's checks of $10,000 or less received as part of a reportable transaction. specified (defined below) or received in a transaction when the recipient knows the instrument is being used to avoid reporting the transaction under section 6050I or 31 USC 5331.
Notes Cash does not include checks drawn on the payer's own account, such as personal checks, regardless of the amount.
Form 8300 (like the FBAR and the new Beneficial Ownership Reporting Form) is a FinCEN form, not a tax reporting form. However, FinCEN, like FBAR (and possibly BOI reporting), has delegated reporting management to the IRS. But keep in mind that the requirement to file Form 8300 only applies to those who receive digital assets as part of a business transaction.
Digital assets, business operations and the profit motive
In general, the purpose of business and investment is to make money. This is true whether investing is your business or you're just an individual trying to fund your retirement account. The pursuit of profit does not automatically turn it into a business, just as registering an LLC does not automatically turn personal expenses into business expenses.
The determination of whether an activity is considered a trade or business is based on the specific facts and circumstances surrounding the activity. For example, even if someone in retirement spends most of their time searching, buying, and selling goods (stocks, small cars, vintage clothing, or NFTs), that doesn't make their activity a business.
Often people want to treat their activities as a trade or business in order to reduce costs, but do not take into account the potential additional consequences (including self-employment taxes). To be clear, just because someone considers an activity to be a trade or business does not mean the IRS (or the court) will approve it. In fact, there have been numerous cases before the U.S. Tax Court in which individuals have been found to be operating a business that the Court has classified as a “non-profit activity” under IRC Section 183.
Article 183 CRI
Perhaps the title of IRC Section 183 only adds to the confusion. Although the section is called “Non-Profit Activities,” the rules associated with this section are commonly referred to as the “Hobby Injury Rules.”
The original purpose of these rules was to prevent people from turning a hobby into a paper business, which could result in "large business losses" that could offset other income. However, this rule is now always used when asking whether an activity is actually a job or a hobby.
Treasury Regulation 1.183-2 contains a (not very helpful) definition of “non-profit activity.” It also includes a (much more useful) list of nine important factors used by the IRS and courts to determine whether a particular activity is a business or a hobby. The pursuit of profit is one of these nine factors, but not the only one.
Trading and investing in digital assets
Are your digital asset transactions subject to Form 8300 reporting? Depends on.
From a tax perspective, digital assets are similar to securities. However, the IRS considers it “property” and not securities. Accordingly, applicable securities rules such as: B. IRC Section 165(g), which governs the invalidity or abandonment of securities, do not apply to digital assets under current guidelines (or lack thereof). These rules also do not apply to securities dealers and brokers.
The IRS has not yet issued guidance on exactly who is considered a digital asset broker or dealer, except for Form 1099 reporting purposes. According to Matt Metras, registered agent and keynote speaker for the National Digital Asset Tax Act, investments in infrastructure and labor define the term. "reseller" in one way, but the proposed Treasury regulations define the term "reseller" somewhat differently. According to Metra, “In my opinion, the rules that apply to securities dealers in 475 cannot apply to cryptocurrency dealers because cryptocurrencies do not meet the definition of securities in 475.” It is therefore advisable to exercise caution and not place undue reliance on the rules applicable to securities traders regarding trading of digital assets until guidance and/or precedent becomes available.
The answer to the question posed in the above post requires a more in-depth study of the specific facts and circumstances of the activity in question. Obviously, the author of the article (like most investors) wants to get a return on his investment. Does this attract them to trade digital assets? As a tax professional, I don't know. There is not enough information here to make such a decision.
Looking at these nine factors, I will ask how much time the author spends on these activities. I would like to ask if the company is registered in the state or if the company has a Doing Business As name. I would like to ask if the company has a separate bank account and how the books and records are maintained (or if there are any).
In other words, I will attempt to determine (based on my knowledge of the law and related court cases) whether a person is actually engaged in NFT trading activities or is simply trying to make a profit on their investment.
If a person is truly involved in NFT (digital art gallery) trading, then...
- Income must be reported on Schedule C (or a corporate tax return, depending on how the company is organized).
- Certain business expenses will be deductible under IRC Section 162.
- Some business expenses may have to be capitalized under IRC Section 263.
- The income represents ordinary income, not capital gains (which are taxed at preferential rates).
- Income is subject to self-employment tax.
- NFTs can be considered inventory rather than corporate assets.
- Any funds or digital assets received in one or more related transactions must be reported on Form 8300.
If a person is simply investing in NFTs in hopes of exchanging them for a profit (as he might do with shares in his retirement account), then:
- Gains from such transactions are reported on Form 8949 (the same form used for cryptocurrency transactions).
- Operating expenses are generally not deductible.
- The profit from the transaction represents capital (and the benefit of preferential interest if it is held for a long time).
- NFTs may be considered collectibles under IRC Section 408(m)(2) and Notice 2023-27.
- Filing Form 8300 is not required.
Diploma
Please note that this article applies to several sections of the IRC as well as applicable rules and form instructions. You can see how quickly change becomes an issue when it comes to the Tax Code. This is why getting tax advice through social media is a bad idea. Most social media platforms cannot perform various analytics, and many self-proclaimed “experts” and “influencers” are taught the basics without understanding how the pieces of code are put together.
Readers who believe that their trading or investment in digital assets may constitute a business that allows them to deduct eligible business expenses and file Form 8300 as required should consult with a tax advisor familiar with digital assets. and basic principles of taxation.