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Treasury Releases Suggestions for Virtual Currency Reporting

MAY 14, 2021

Treasury Releases Suggestions for Virtual Currency Reporting

DATED MAY 14, 2021

DOCUMENT ATTRIBUTES

Subject Area/Tax Topics
Cryptocurrency
Tax policy
Jurisdictions
United States
Tax Analysts Document Number
2021-23080
Tax Analysts Electronic Citation
2021 TNTG 110-29
2021 TNTF 110-33

[Editor's Note:

The author of this document has not been independently verified.

]

Virtual Currency Reporting

CONFIDENTIAL — DO NOT DISTRIBUTE

Draft of 5/14/2021

Policy Goal: Broader adoption and use of virtual currencies (including cryptocurrency) increases the need for tax guidance that can provide certainty and help encourage compliance. The proposals outlined below build off of existing tax regimes, by treating certain virtual currency similarly to other similar assets, as appropriate. There are three basic components:

Section 6045 (Broker Reporting) — Provide for broker reporting on transactions involving reportable virtual currency. This builds on established tools that improve tax compliance related to transactions for other assets, including securities and real property. It is also consistent with the inclusion of cryptocurrency broker reporting in the PGP (see p. 22).
Section 6050I (“Cash” Reporting) — Require reporting by taxpayers who accept reportable virtual currency in a trade or business, when there is a transaction (or group of related transactions) involving more than $10,000 worth of reportable virtual currency. This builds on existing reporting for cash transactions, and reflects the fact that taxpayers using cryptocurrency for tax evasion will need to ultimately convert the cryptocurrency to fiat currency, goods, or services. It also fills a potential gap in the broker reporting proposal caused by the fact that cryptocurrency can be acquired or disposed without a broker.
Section 6038D (Specified Foreign Financial Asset Reporting) — Ensure that existing self-reporting rules on high-risk assets include reportable virtual currency. This is an area of current regulatory uncertainty.

This suite of proposals complements the Administration's proposal to require information reporting by financial institutions, to reduce the risk that greater visibility into such accounts shifts of non-compliance into low-visibility virtual currencies. Financial account reporting could be drafted to cover reportable virtual currency.¹ Such inclusion would not negate the need for transaction-based broker reporting, 6050I reporting, or 6038D reporting.

Legislative Text

26 U.S.C. 6045 Changes (Reporting with Respect to Transfers of Reportable Virtual Currency)

Add a new 6045(i) as follows:

(i) Reportable virtual currency. —

(1) Return required in the case of transfer. — The virtual currency intermediary (or any other person specified in regulations by the Secretary) with respect to a transfer of reportable virtual currency shall file a return under subsection (a) and a statement under subsection (b) with respect to such transfer.

(2) Additional information required. — The virtual currency intermediary shall include the following information on any return or statement filed pursuant to paragraph (1) with respect to a transfer of a unit of reportable virtual currency:

(A) Under regulations provided by the Secretary, appropriate identifying information regarding the reportable virtual currency, including but not limited to the name by which it is popularly known or marketed.

(B) the date that the transferor acquired such unit.

(D) Any other information required by the Secretary.

(3) Reliance on transferor's certification. — For purposes of the information described in subparagraph (B), the virtual currency intermediary may rely on the transferor's certification with respect to such information —

(A) unless such intermediary knows, or has reason to know, that such certification is false or fraudulent, and

(B) if such intermediary reports such reliance on any return or statement filed pursuant to paragraph (1).

(4) Definitions. — For purposes of this subsection —

(A) Reportable virtual currency.² — The term “reportable virtual currency” means [“any right, interest, access, control, instruction, distributed ledger, software code in a digital item intended to provide a user with the ability to transfer a digital item to another person in exchange for property, services, money or digital items (including digital items of the same type), in each case such that is” or “an electronic representation of value”] that is designed, marketed, or intended to be perceived or actually used as a substitute for currency.

(B) Virtual currency intermediary. — The term “virtual currency intermediary” means a person that, with respect to an acquisition, disposition, or other transfer of reportable virtual currency, acts as a custodian, broker, nominee, or otherwise as an agent for another person, regardless of whether such other person is the beneficial owner of the amount paid, a flow-through entity, or another intermediary.

(5) Special rules. — Rules similar to the rules of subsection (g)(2)(B)(iii), subsection (g)(4), and subsection (g)(5)³ shall apply for purposes of this subsection.

(6) No double reporting. — A person that files a return pursuant to paragraph (1) with respect to a transfer shall not be required to include information with respect to such transfer in returns made under section 6050W.

(7) Regulations. — The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out this subsection, including regulations regarding the appropriate treatment of reportable virtual currency derivatives.

[(8) Exception for transfers not involving United States persons. — Under regulations to be provided by the Secretary, Paragraph (1) shall not apply to a transfer if the virtual currency intermediary receives appropriate statements from each of the transferor [and the transferee]⁴ to the effect that each is not a United States person.]

26 U.S.C. 6050I

Amend 6050I(d) to read as follows

(d) Cash includes foreign currency, reportable virtual currency, and certain monetary instruments

For purposes of this section, the term “cash” includes —

(1) foreign currency,

(2) reportable virtual currency (as defined in Section 6045(i)(4)(A)⁵ and

(3) to the extent provided in regulations prescribed by the Secretary, any monetary instrument (whether or not in bearer form) with a face amount of not more than $10,000.

Paragraph (3) shall not apply to any check drawn on the account of the writer in a financial institution referred to in subsection (c)(1)(B).

26 U.S.C. 6038D Amendments

Amend 6038D(b) by adding a new (b)(3) to read “(3) any reportable virtual currency (as defined in Section 6045(i)(4)(A))⁶.”

Renumber 6038D(c)(4) as (c)(5), and add a new (c)(4), as follows:

(4) In the case of any reportable virtual currency —

(A) appropriate identifying information regarding the reportable virtual currency,

(B) the date acquired,

FOOTNOTES

¹Former Commissioner Rossotti recommends adding cryptocurrency exchanges as financial services providers for purposes of proposed Form 1099New. See https://www.finance.senate.gov/imo/media/doc/SFC%20written%20submission%20final05082021.pdf at page 19.

²Note that the IRS has previously defined “virtual currency” as “a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.”

³Since we are in 6045(g), will flag possible treatment as “specified/covered securities.” Generally, recommend such treatment, as basis reporting seems useful/appropriate.

⁴Unclear if the broker will always have information about the transferee

⁵As proposed in this document.

⁶This structure of the definition means that any reportable virtual currency is considered to be foreign (and thus, reportable under 6038D if the thresholds are met). This could be narrowed, so that 6038D virtual currency reporting only applies to foreign reportable virtual currency. Such an approach would require a tricky (and likely gameable) determination of when reportable virtual currency is foreign.

END FOOTNOTES

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