Aug 16 NEW INFRASTRUCTURE BILL TARGETS UNDERREPORTING OF CRYPTOCURRENCY TRANSACTIONS
The US Senate has passed a $1 Trillion Infrastructure Investment and Jobs Act which includes a provision that, if enacted in its current form, would amend the Internal Revenue Code that extends certain reporting requirements of transactions involving digital assets, including cryptocurrencies like Bitcoin and other forms of digital tokens. This would help to aid the IRS’s crypto tax enforcement efforts and would directly impact brokers and some crypto investors.
The Act would require crypto brokers – a firm or individual that serves as a middleman in the buying and selling of crypto – to send information returns annually to the IRS and to consumers. Brokers would likely need to issue Form 1099-B.
Changes and new reporting requirements for brokers and digital assets from the Infrastructure Bill as now written include the following:
- The bill identifies a “broker” as anyone “responsible for and regularly providing any service effectuating transfers of digital assets on behalf of another person,” and anyone thus identified would be subject to tax reporting requirements.
This part of the bill is controversial and raises two concerns:
1. The current definition of a broker is too broad, and would include wallet makers, software developers, miners, and others who help run the crypto network. As an example, miners – those who enter new cryptocurrency into circulation – use a “proof of work” system by solving algorithms with computers and software that, if correct, serves as verification for crypto transactions. Miners seemingly fall under the expanded definition of “brokers” but do not have customers, so they would not be able to access the information necessary to complete a 1099 tax form.
2. This reporting requirement breaches digital privacy because the blockchain works without a middleman or a traditional broker, allowing people to remain anonymous.
- The Act would provide that a digital asset is a specified security effective January 1, 2023. Therefore, on that date, a digital asset would be a covered security and brokers would have to report a customer’s basis and gain/loss when customers sell or exchange the digital asset.
- Broker to Broker Transfers – Any transfer of a covered security (digital asset) from an account maintained by a broker to an account not maintained by a person that the broker knows or has reason to know is also a broker would be required to report the transfer for the calendar year. This reporting would be in a form as determined by the IRS, which would disclose information concerning the transfer, including basis reporting and other information about the receiving broker/person.
- Digital assets treated as cash – The Act would provide that cash would include any digital asset for any transactions after December 31, 2023, and that a person engaged in a trade or business who receives more than $10,000 in cash (in 1 or more related transactions) must file an information return with the IRS and furnish the payor with a statement.
Sax’s Cryptocurrency Advisors will provide further updates as they emerge and as this Act evolves. Should you have any questions or concerns with the pending Bill, feel free to reach out by visiting www.saxllp.com or calling us at (973) 472-6250.