Understanding Changes in Digital Asset Reporting for Dental Practices

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Cryptocurrency: The Basics

What you need to know about cryptocurrency

There’s a lot of buzz surrounding cryptocurrency these days, inspiring our recent podcast Cryptocurrency: An Introduction. Bitcoin, the first cryptocurrency, has been around for a decade. Yet crypto is still a mystery to most. There are over 15,000 different cryptocurrencies available! But only around 16% of Americans say they have invested/traded in crypto. However, some platforms such as Bitcoin and Ethereum have exploded in value from just a few years ago, enticing more investors and novices. If you haven’t yet explored crypto, should you consider investing? What are some risks? How should you report your transactions to the IRS? Let’s explore.

De-Fi

Cryptocurrency is virtual currency existing on the internet. Unlike traditional currency, crypto is decentralized, meaning it isn’t under a single entity’s control. In this sense, cryptocurrencies don’t belong to any one country and can’t be controlled by a government or bank. Think of the US Dollar. The US government created it and regulates it. Conversely, crypto is part of a broader concept called decentralized finance (DeFi). DeFi removes bank control over money and financial services. It is secured through cryptography using blockchain technology. In simple terms, it uses an encryption technology that keeps transactions secure and an algorithm that eliminates the need for middlemen. It makes it impossible to counterfeit transactions or double-spend, which happens quite frequently with traditional currency. It also allows borrowing without the need for a bank.

Blockchain

As its name suggests, you can view the blockchain as a set of connected blocks or an online ledger. Each block holds information about a set of transactions and is verified independently by each member (computer) in the network. Once a transaction is formed, it can’t be changed, making forgery nearly impossible. But blockchain is not just for crypto. Companies are researching many uses for this technology including banking, medical records, and self-driving cars.  

Storage

Despite the secure technology behind crypto, there is risk when it comes to storing your coin. You have several options to safely store your crypto, each with its pros and cons.

Cold-storage options mean putting your coin on a hard drive or USB drive that is not connected to the internet. Third-party companies such as Trezor and Ledger make very secure hardware wallets. This is the preferred method to store large quantities of crypto. It’s safe from online theft so long as there is some antivirus software in place. Unfortunately, hardware wallets can be lost, stolen, or damaged. This means the coin stored on the device may be lost forever.

With hot-storage, or cloud-based storage, you use a third-party app or digital wallet. Digital wallets shouldn’t be used to store large amounts of crypto. Rather, use digital wallets only to store small amounts for trade or transactions. Some popular examples include Coinbase wallet, Kraken, and Exodus.

Tax Treatment

The IRS treats gains and losses from exchanging crypto like selling stocks or real property. This means that if you buy a coin for $20,000 and sell for $40,000 you realize a taxable capital gain of $20,000. It may be either long-term or short-term depending on your holding period. The IRS’s desire would be to require annual disclosure from the crypto exchanges–1099s of some sort. But it doesn’t have the resources or means currently to crackdown on crypto exchanges.

But this doesn’t mean you can avoid reporting your gains. Crypto operates on an “open-ledger” which means that all transactions are visible to the public and thus to the IRS. The IRS is currently slow to enact any changes to the law regarding the tax treatment of virtual currencies. However, it has encouraged exchanges such as Coinbase to report transactions over $20,000. Some exchanges may voluntarily comply with this request by sending a 1099.  

Wrap-up

Ultimately your decision to invest…or not…in crypto will depend on many factors. Is there value in the underlying technology of crypto which determines if there is value in crypto itself? Is the idea of decentralized finance important to you? How will a crypto investment affect your overall financial health? Consider making a conscious decision before investing. Don’t let the complexities steer you away from the discussion.