New digital asset reporting requirements

| 12/9/2021
New digital asset reporting requirements

The bipartisan Infrastructure Investment and Jobs Act signed into law on Nov. 15, 2021, includes new reporting requirements for virtual currency and other digital assets. The new requirements include expanding broker reporting under IRC Section 6045 to include digital assets as well as expanding IRC Section 6050I reporting to cover a trade or business that receives more than $10,000 in digital assets. The act also broadly defines digital assets. The new IRC Section 6045(g)(3)(D) provides that “[e]xcept as otherwise provided by the Secretary, the term ‘digital asset’ means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”

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Following are highlights of the new provisions.

Broker reporting for digital assets

Overview

IRC Section 6045 generally requires that each person doing business as a broker files and furnishes information returns (Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions”) to report information about each customer, gross proceeds, and other details as required by regulations.

IRC Section 6045(g) requires cost-basis reporting with respect to covered securities, which are specified securities acquired after a certain date (either 2011, 2012, or 2013). Specified securities could include stocks, debt instruments, options, and securities futures contracts.

In addition, IRC Section 6045A generally requires transfer reporting, whereby brokers who transfer specified securities provide a transfer statement to the receiving broker. The transfer statement includes information about the specified security, the customer, the transferor, and the recipient. Transfer statements must be provided within 15 days of the settlement of the transfer.

Changes made by the act

Prior to the act’s enactment, IRC Section 6045(c) defined broker to include “a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services.”

The act expands the definition of broker to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The act also adds digital assets acquired on or after Jan. 1, 2023, to the list of covered securities subject to cost-basis reporting. As a result, digital assets acquired on or after Jan. 1, 2023, are subject to transfer reporting under IRC Section 6045A.

The act also expands transfer reporting by amending IRC Section 6045A to provide that “[a]ny broker, with respect to any transfer (which is not part of a sale or exchange executed by such broker) during a calendar year of a covered security which is a digital asset from an account maintained by such broker to an account which is not maintained by, or an address not associated with, a person that such broker knows or has reason to know is also a broker, shall make a return for such calendar year, in such form as determined by the Secretary, showing the information otherwise required to be furnished with respect to transfers subject to [transfer reporting].”

These changes are effective for information returns required to be filed and statements required to be furnished after Dec. 31, 2023.

Digital assets treated as cash for $10,000 reporting

Unless an exception applies, IRC Section 6050I requires any person who receives more than $10,000 in cash in the course of their trade or business to file Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business,” and to provide a written statement to the payer. Civil and criminal penalties may apply for failure to comply with IRC Section 6050I.

The act expands IRC Section 6050I to include digital assets. These changes are effective for information returns required to be filed and statements required to be furnished after Dec. 31, 2023.

Looking ahead

These new rules are effective in 2023, slightly more than a year from now. Generally, filers need significant lead time to comply with new information reporting requirements. The time needed to comply is even longer when the requirements are novel and apply to those who previously did not have filing requirements, as is the case with digital assets. In addition, challenges with meeting information reporting requirements, such as obtaining necessary information from payees, could be significant for certain digital asset transactions, especially those involving decentralized finance.

To further complicate matters, the terms “broker” and “digital asset” are broadly defined in the act. Taxpayers will not have certainty about whether they are subject to the new reporting requirements until the U.S. Department of the Treasury and the IRS provide guidance. However, guidance might not be provided until well into 2022. Additionally, members of Congress have raised the idea of enacting legislation to narrow the definition of broker. Uncertainty about whether Congress will amend these new provisions also could delay the guidance process.

Given the short time before these provisions become effective and the current lack of guidance, it is important that participants in the digital asset ecosystem consider whether they might be subject to the new reporting requirements and, if so, evaluate their systems and processes to identify changes that would need to be made to comply.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax
Trudie Kanter
Trudie Kanter
Managing Director, Financial Services
people
Eli Tabakov