IIJA’s New Digital Asset Reporting Requirement

The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. One major provision of the IIJA includes a requirement that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions to the IRS. This will will require that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions for all digital assets starting in 2023.

Existing reporting rules. As might already be aware if you have a stock brokerage account, whenever you sell stock or other securities you receive a Form 1099-B at the end of the year reporting your security gains and losses. This Form 1099-B reports the details of transactions, such as sale proceeds, relevant sale or purchase dates, your tax basis for the sale, and the character of gains or losses (long-term, short-term, etc.). Additionally, if you were to transfer stock or securities from one broker to another, your old broker is required to provide your new broker with information on the holdings that were transferred, such as tax basis or date acquired.

Digital asset broker reporting. The IIJA expanded the definition of brokers to include Crypto Exchanges and other service providers that are providing transfers of digital assets on behalf of another person. This means that any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.

Transfer reporting. Sometimes you may have a transfer transaction that is not a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another Crypto Exchange, the transaction is not a sale or exchange. For that type of transfer, as with stock, the old Crypto Exchange will be required to furnish relevant basis and other information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. We expect that this filing will include generally the same information that is furnished in a broker-to-broker transfer.

What are Digital assets. For the reporting requirements, a “digital asset” is any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. The IRS can (and may) modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting. Historically, when a business receives $10,000 or more in cash in a transaction, that business is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA now requires that businesses treat digital assets like cash for purposes of this reporting requirement, for reporting that is due after December 31, 2023.

Closing. Some things to keep in mind: First, if you use a Crypto Exchange, and it has not already performed a KYC (Know Your Customer), expect it to do so soon. Second, the transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. Third, a reporting intermediary does not always have perfect information, especially when it comes to an entirely new type of reporting. Expect the first information reporting cycle for this reporting requirement to be a bit bumpy.

Remember that as your trusted CPA advisors, we are here to help you and can provide solutions for any challenges that may develop.

IIAJ Retroactively Terminates Employee Retention Tax Credits

The Infrastructure Investment and Jobs Act (IIAJ) (to be signed by President Biden on November 15, 2021), retroactively ended the Employer Retention Tax Credit (ERTC) to apply only through September 30, 2021 (rather than through December 31, 2021), unless the employer is a recovery startup business. As a result of retroactive termination of the ERTC, you may need to review your payroll tax compliance (including tax deposits) to make sure that it conforms with these changes.

Background. Congress originally enacted the ERTC in the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020 to encourage employers to retain employees during the pandemic. Congress later extended and modified the ERTC to apply to wages paid before January 1, 2022.

Eligible employers could claim the refundable ERTC against the employer’s share of Medicare (1.45% rate) taxes equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.

For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERTC. Under pre-IIAJ law, a recovery startup business was defined as a business that

  1. Began operating after February 15, 2020,
  2. Had average annual gross receipts of less than $1 million and
  3. Didn’t meet the eligibility requirement, applicable to other employers, of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.

However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.

IIAJ retroactive termination. The ERTC was retroactively terminated by the IIAJ to apply only to wages paid before October 1, 2021 unless the employer is a recovery start up business. Thus, for wages paid in the fourth calendar quarter of 2021,

  1. The credit applies only to recovery startup businesses and
  2. Other employers can not claim the credit.

In connection with the continued availability of the ERTC for recovery startup businesses in the fourth quarter of 2021, the IIAJ also modified the definition of a recovery startup business so that a recovery startup business is one that

  1. Began operating after February 15, 2020, and
  2. Has average annual gross receipts of less than $1 million.

The pre-IIAJ prerequisite that a recovery startup business must not have otherwise met the requirements for an eligible employer qualifying for the ERTC, i.e., having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order, no longer applies. Thus, because of the modified definition, an employer that was not a recovery startup business in the third quarter of 2021 might qualify as a recovery startup business in the fourth quarter of 2021 and be able to claim the ERTC for the fourth quarter of 2021.

If you retained payroll taxes in anticipation of receiving the ERTC based on post-September 30, 2021 payroll taxes, we need to review your situation and determine how and when to repay those taxes and address any other compliance issues. We anticipate IRS will issue guidance to assist employers in handling any compliance issues.

If you have additional questions or concerns about how the retroactive termination of the ERTC will affect your business, please let us know.

How-To Plan Now to Make Filing Your Taxes Easier in 2022

This tax year will be another complex year as many taxpayers received stimulus payments or advance Child Tax Credit payments and will need to take steps now to make filing their tax returns easier in 2022.

Planning will help ensure you are able to file an accurate return and avoid any delays with the IRS processing your return or refund.

Here some steps that you can take now:

Gather and organize tax records. Collecting and organizing all necessary documents and information will help you to avoid filing errors that lead to processing and refund delays. A list of important tax forms that you should be gathering can be found here.

It is especially important that you also keep record of any virtual currency transactions for any purchases, sales, trades, or exchanges of digital assets such as Bitcoin, Ethereum, Litecoin, etc.

In addition, if you also received an Advance Child Tax Credit (ACTC) and/or Premium Tax Credit (PTC) or an Economic Impact Payment and want to determine your eligibility for a Recovery Rebate Credit, should also keep the following documents on hand:

Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage, and
Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit.

The IRS will mail Letters 6419, 6475 and Form 1095-A to you, so be sure to notify the IRS of any change of address.

If you don’t receive, or can’t find your Letters 6419, 6475 or Form 1095-A, you can can retrieve the information on these letters using your online account.

Check tax withholding and/or estimated payments. Finally, we recommend that you check your tax withholding if you owed taxes or received a large refund last year. If you owed taxes last year, you might want to consider having additional amounts withheld or making estimated tax payments to avoid an underpayment penalty. This is especially important if you got married or divorced, had a child, or took on a second job.

You may also need to consider if you need to make estimated tax payment. If you received a substantial amount of non-wage income, such as self-employment income (including non-wage gig income), investment income, taxable Social Security benefits or pension and annuity income, you should make quarterly estimated tax payments or increase your wage withholding to cover the taxes on this type of income.

Please contact our office if you’d like for us to prepare an analysis of projected taxable income and related tax liability.

IRS announces 401(k) limit increases to $20,500

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased from $19,500 to $20,500 beginning with the 2022 calendar year.

Additionally, the income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit have also all increased for 2022.

Below are the updated phase-out ranges for IRA contributions in 2022:

Single Taxpayers

For single taxpayers covered by a workplace retirement plan (even if only for a portion of the year), the phase-out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.

Married Filing Jointly Taxpayers

If the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

If the spouse making the IRA contributor is not covered by a workplace retirement plan but is married to someone who is covered, the phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

Married Filing Separately Taxpayers

If a taxpayer is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs

The income phase-out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for single and head of household taxpayers, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Simple IRAs

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.

Key employee contribution limits that remain unchanged

The limit on annual contributions to an IRA (Roth or Traditional) remains unchanged at $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000, for a maximum contribution amount of $7,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.

Details on these and other retirement-related cost-of-living adjustments for 2022 are in Notice 2021-61, available on IRS.gov.