New Tax Reporting Requirements for Cryptocurrencies and Other Digital Assets in Senate Infrastructure Bill
On August 10, 2021, the U.S. Senate passed a $1 trillion infrastructure bill after months of negotiations. Tucked away within the sweeping legislation are measures that would extend Form 1099-B and cost basis reporting requirements to so-called “digital assets” such as Bitcoin and Ethereum. The requirements, which are expected to raise $28 million of revenue for the bill, could impose onerous tax reporting obligations on crypto miners, software developers, and other players in the industry that may not have the resources or capabilities to report user transactions.
The Proposed Reporting Requirements
Under the Senate bill, starting on January 1, 2023, a “broker” will be required to report transactions involving “digital assets” for the calendar year to the IRS on Forms 1099-B or another similar tax form. The legislation would treat digital assets as “specified securities,” meaning brokers would need to track and report such information as the identity of customers as well as the cost basis and gain/loss from the sale of digital assets. Under the bill, brokers would also be required to report transfers of digital assets to non-brokers. For purposes of the new requirement, digital assets would include any “digital representation of value” recorded on a blockchain or similar technology. This expansive definition would cover all cryptocurrencies and potentially other forms of digital assets such as non-fungible tokens (NFTs). As with traditional Form 1099-B reporting, taxpayers may be subject to substantial penalties for failure to file or timely file an informational return with the IRS.
Perhaps more controversially, the Senate bill would loosely define a broker as any person who (for consideration) regularly provides any service effectuating transfers of digital assets on behalf of another person. Crypto advocates have raised concerns that, given this broad definition, crypto miners, wallet developers, and other players that do not have the capabilities to track user transactional activities could be treated as brokers subject to the reporting requirements. To illustrate, consider the role of a Bitcoin miner. Miners play a critical role in securing the blockchain by verifying Bitcoin transactions through solving complex mathematical puzzles in exchange for a specified amount of Bitcoin. Because miners are verifying thousands of transactions per day and do not have access to the identities of users during the process, they would not be able to produce the information required to be reported under the Senate bill.
Finally, the legislation would modify Section 6050I to treat digital assets as cash. Under this section, a person that receives more than $10,000 of cash (including digital assets) in one or multiple transactions must file a Form 8300 return with the IRS. This requirement, if enacted, could impose burdensome requirements on companies that accept cryptocurrency as a form of payment.
Passage in the U.S. House of Representatives and Treasury Announcement
Despite opposition from a growing number of congressional members on the broker definition in the Senate bill, the Speaker of the U.S. House of Representatives has indicated that the House intends to pass the infrastructure bill without any further amendment when it takes the legislation up. Assuming the bill is passed unamended, the action will then shift to whether the U.S. Treasury and IRS will narrow the interpretation of broker to exclude miners, developers, and other players without the resources to comply with the reporting requirements.