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08/18/2021
Infrastructure bill contains new reporting requirements for cryptocurrency ‘brokers’
For developers, owners, traders, and brokers of cryptocurrencies, the Senate’s recently passed bipartisan infrastructure bill contains a proposal worth tracking. That proposal, which has now moved to the House of Representatives, contains a proposed change in law in how certain “digital assets” are reported to the IRS.
In negotiating the bill’s $550 billion price tag, lawmakers and the White House agreed to a budgetary assumption that $28 billion in new revenue could be raised by changing the tax reporting rules on cryptocurrency.
The proposed changes effectively alter the definition of a “broker” to include a broad category of entities, correlating to an expansion of how cryptocurrency transactions are reported. The new bill would increase information reporting requirements for cryptocurrency “brokers” – and would impose significant fines and penalties for noncompliance. However, the proposed legislation does not impose new reporting requirements or penalties on investors themselves.
A key proposed change is to Section 6045(c)(1) of the Internal Revenue Code (IRC), where the definition of “broker” would be revised to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Thus, together with the other proposed revisions, this implies a requirement for such “broker” to file an information return reporting the transaction.
Because the words “any person” can be interpreted broadly, possibly to include those performing “mining” or other services, the proposal risked derailing the legislation.
Then, in a rescue effort, on Aug. 9, Sens. Rob Portman (R-OH), Mark Warner (D-VA), Pat Toomey (R-PA), Kyrsten Sinema (D-AZ), and Cynthia Lummis (R-WY) announced “an agreement on an amendment to clarify digital asset reporting requirements.” In their comments, the senators noted that they were working to make sure that “those who are not acting as brokers will not be subject to the bill’s reporting requirements.”
The group added that “it’s important to ensure that these obligations are properly crafted to apply only to entities that are regularly effectuating transactions of digital assets in exchange for consideration. To best memorialize this common understanding, we propose to incorporate this important amendment into the infrastructure bill and urge our colleagues to join us in enacting this bipartisan clarification.”
However, the proposed amendment was blocked later that same day. But after consultations between the Senate, the U.S. Treasury, and the Joint Committee on Taxation, Sen. Portman sought to clarify the scope of the term “broker” by adding his detailed comments in the form of a colloquy with Sen. Warner, making that colloquy an official part of the Congressional Record. Doing this provided legislative history on this provision, which the IRS and the courts can later use to interpret the scope of the new law to a narrow class of true “brokers” rather than mere transaction facilitators.
Alternatively, Bloomberg has reported, citing an anonymous Treasury official, that the Treasury plans “to clarify that only cryptocurrency companies it considers brokers will need to comply with [the] proposed IRS reporting requirements,” and that the guidance “won’t grant blanket exemptions based on how firms identify themselves and instead will focus on whether a firm’s activities qualify it as a broker under the tax code.” We will watch for and provide updates.
Currently the IRS treats virtual currency like property as opposed to a security. As such, cryptocurrency brokers currently aren’t required to provide a Form 1099-B, as securities brokers are. However, because cryptocurrencies often trade rapidly like stocks or bonds, it can be difficult to calculate the tax basis for a transaction after-the-fact and thus the resultant gain or loss. The bill’s cryptocurrency broker reporting requirement is aimed at ensuring that information to calculate gain appropriately is being provided. Moreover, the bill’s change to Section 6045A of the IRC would result in a requirement that “brokers” provide information returns that report transfers of digital assets from an account maintained by a broker to an account not maintained by a broker (generally thought to be aimed at cold wallet storage transactions).
In an ironic twist, the terms “cryptocurrency” or “virtual currency” never appear in the bill. Instead, a “digital asset” is defined in proposed new Section 6045(g)(3)(D) as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”
Additionally, “digital assets” would now be included under IRC Section 6050I reporting, which requires a report by a business (on Form 8300) for any transaction or series of related transactions that results in more than $10,000 being received by that business.
Some industry groups, including the Blockchain Association, Coin Center, and the Association for Digital Asset Markets, have expressed opposition to the new reporting requirements. In a blog post on Aug. 2, the Electronic Frontier Foundation said the new clause is a “disaster” and could stifle competition by creating “more legal complexity to developing blockchain projects or verifying transactions in the United States – likely leading to more innovation moving overseas.” The EFF noted that the language of the bill “leaves open a door for almost any entity within the cryptocurrency ecosystem to be considered a ‘broker’ – including software developers and cryptocurrency startups that aren’t custodying or controlling assets on behalf of their users.”
Cryptocurrencies remain a significant area of interest for investors and regulators alike. While the category reached a record $2 trillion in capitalization this past April as investors padded their portfolios, domestic and global oversight remains hazy. On Aug. 3, as Congress began debate on the infrastructure bill, SEC chair Gary Gensler told a global conference that he hoped Congress would give his agency more authority over cryptocurrency transactions and platforms.
The proposed legislation, if passed, would not be effective until 2023. This would give exchanges over a year to make preparations to comply with any new requirements.
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Lee Peterson
JD, Senior Manager
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