With the rise of cryptocurrencies and other digital assets, the IRS has been expanding its focus on ensuring proper tax compliance in this evolving space. Significant changes to digital asset reporting will affect businesses, including dental practices. These changes primarily center around reporting obligations and the expiration of safe harbor provisions.
What is the Digital Asset Reporting Rule?
Digital asset reporting refers to the requirement that businesses and individuals disclose their holdings and transactions involving cryptocurrencies or other digital assets. This mandate was first introduced as part of the Infrastructure Investment and Jobs Act (IIJA) signed into law in 2021. The law requires brokers to report cryptocurrency transactions to the IRS and provide information to the account holder, similar to how traditional financial institutions report stock or bond sales.
The IRS expanded its definition of brokers to include entities facilitating cryptocurrency exchanges and transactions, meaning that dental practices may now have more stringent reporting obligations if they handle digital assets.
What Does the Expiration of the Safe Harbor Mean?
Since the IIJA passed, a transitional safe harbor has been in place to provide taxpayers some flexibility in adjusting to the new reporting rules. Under this safe harbor, taxpayers were not penalized for underreporting or failing to report certain digital assets if they made a good faith effort to comply.
However, this safe harbor expires on January 1, 2025. This means that starting in 2025, dental practices and other businesses that deal with digital assets will be fully accountable for meeting the reporting requirements. Failure to comply could lead to penalties, audits, or other tax-related consequences.
Key Changes and What to Expect
Several changes in the IRS’s approach to digital asset reporting will take effect in 2025, which dental practice owners should be aware of:
- Broader Reporting Requirements: Businesses will need to report all cryptocurrency transactions to the IRS, including those made on behalf of patients or as part of payment for services. This also applies to indirect exchanges and sales through third-party platforms.
- New Reporting Forms: The IRS will require businesses to use new reporting forms, such as the Form 1099-DA, which will document transactions related to digital assets, similar to the traditional Form 1099-B for securities.
- Penalties for Non-Compliance: Once the safe harbor ends, failure to comply with the new digital asset reporting requirements can result in significant penalties. Businesses may face audits or fines for underreporting or failing to report cryptocurrency transactions.
- Clarification on Digital Asset Definitions: The IRS has expanded the definition of “digital assets” to include not only cryptocurrencies but also NFTs and other digital tokens. Practices that accept any form of these digital assets will need to ensure proper documentation and reporting.
What Dental Practices Should Do to Prepare
With the expiration of the safe harbor fast approaching, dental practices should take the following steps to ensure they remain compliant with IRS rules:
- Review Existing Digital Asset Policies: Practices that accept cryptocurrency or other digital assets as payment should assess their current practices for recording and reporting these transactions.
- Consult with E&A: Given the complexities surrounding digital asset taxation, consulting with tax professionals who understands the specific requirements for digital assets is crucial.
- Upgrade Financial Tracking Systems: If your practice deals with digital assets, make sure your accounting and payment systems are equipped to properly track these transactions for IRS reporting.
- Educate Staff: Ensure that your practice managers and financial staff are up to speed on the new reporting obligations. Having clear processes for handling cryptocurrency payments and other digital assets will be critical for compliance in 2025 and beyond.
As the IRS continues to increase its focus on digital assets, it is vital for dental practices to stay proactive and compliant. With the expiration of the safe harbor, proper reporting is no longer optional, and penalties for failing to meet IRS standards can be significant. Now is the time to review your practice’s digital asset policies and ensure you are prepared for the changes that will come into effect in 2025.
For more detailed guidance, dental practice owners should reach out to us to help them navigate these updates and avoid costly mistakes.