Senate Approves Expansive Information Reporting Requirements for Cryptocurrency
The Senate has finally approved its bipartisan infrastructure plan. The bill requires cryptocurrency brokers to increase transparency by reporting transaction data to the Internal Revenue Service. According to the Joint Committee on Taxation, these information reporting provisions are expected to generate $28 billion over the next ten years.
Broad Definition of Broker
A troubling aspect of the bill is its broad definition of broker. Under IRC Sec. 6045(c)(1), a broker is currently defined to include any person who (for a consideration) regularly acts as a middleman with respect to property or services. The infrastructure bill modifies the definition by including “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” As a result, the bill subjects all entities in the crypto ecosystem to information reporting, including miners and software designers that would not have access to the type of data that the bill requires them to report.
Concerned that the definition of broker was overly expansive, groups of senators introduced amendments to the bill. Senate Finance Committee Chairman Ron Wyden (D-OR), along with Finance Committee member Patrick J. Toomey (R-PA) and Senator Cynthia Lummis (R-WY), introduced an amendment that would exclude miners, software designers and protocol developers from those required to report data to the IRS. Senator Mark Warner (D-VA), joined by Senator Kyrsten Sinema (D-AZ) and Senator Rob Portman (R-OH), introduced their own amendment, which only sought to exclude some software developers and crypto miners. These amendments were ultimately blocked, leaving the far-reaching definition of broker in place as the legislation moves to the House for consideration, where similar amendments could resurface.
With respect to cryptocurrency, the bill also:
- Defines a digital asset as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary;
- Imposes reporting on brokers who transfer a digital asset from an account the broker maintains to an account not maintained by the broker, or an address not associated with, a person that such broker knows or has reason to know is also a broker;
- Imposes penalties for failure to file information returns; and
- Requires anyone engaged in a trade or business that receives more than $10,000 in digital assets in the course of the trade or business in one or multiple related transactions to file Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business” with the IRS.
These changes would apply to returns required to be filed, and statements required to be furnished, after December 31, 2023.
Are the Information Reporting Burdens Too High?
The new reporting requirements would require building brand new infrastructures by industry players largely unfamiliar with regulatory and reporting frameworks in a little over two years. The industry that was born out of a desire of anonymity will need to develop processes to obtain and maintain identifying information of owners of the digital assets that are required to be reported. To fully comply with the reporting obligations, the brokers (as very broadly defined) will need to report tax basis of the assets being transferred. The current guidance on the calculation of basis is derived from the treatment of cryptocurrency as property and is largely provided via FAQs issued by the IRS. These rules may not be practicable or aligned to the way cryptocurrency is maintained by the exchanges, which means additional regulatory guidance will be needed to develop workable basis calculation methodologies, which will then need to be programmed as part of reporting implementation. Back in 2008 when the basis reporting rules were first passed, guidance gave brokers up to four years to develop systems to report basis of traditional securities with established rules around how basis was to be calculated. And it took Treasury nearly two years to issue clarifying regulations. So, while the desire for transparency is very clear in the newly passed bill, the practical implications and ways forward on implementation will require a lot more thoughtful guidance in an incredibly short time period.
Recent Enforcement Efforts
The infrastructure bill is not the first effort to address this emerging asset class. The IRS is already intensely focused on virtual currency. Since July of 2018, the IRS has had an active virtual currency campaign, conducting IRS examinations to ensure the sale or exchange of virtual currency complies with the general tax principles applicable to transactions in property. See Notice 2014-21. The campaign urges taxpayers with unreported virtual currency transactions to correct their returns as soon as practical, as the IRS is not contemplating a voluntary disclosure program to address tax non-compliance. The IRS has also developed a dedicated Virtual Currencies webpage to provide education to taxpayers on the tax treatment of virtual currency transactions and to keep the public informed about related guidance in this area.
For a third year in a row, Form 1040, U.S. Individual Income Tax Return, includes a question on virtual currency. Also, Form 433, Collection Information Statements, used by taxpayers to request payment plans from the IRS, requires a disclosure of any virtual currency assets. The IRS continues to scrutinize this digital asset class and lists information reporting guidance for taxable virtual currency transactions in its current Priority Guidance Plan.
Additionally, the Department of Justice recently received permission to serve John Doe summons on two digital currency exchanges for information on cryptocurrency transactions of $20,000 or more. The IRS is expected to take further steps to investigate tax non-compliance related to virtual currency as a result.
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