The Senate's infrastructure bill is out, and as expected, it includes tax information reporting on cryptocurrencies. What will this mean for the digital currency industry? And why has Congress suddenly decided to require this information reporting?
Let’s answer the second question first: $28 billion. That’s the estimate of how much the proposed reporting requirements might raise, and Congress is evidently working off that estimate. But there are even more bullish estimates, such as the one from the National Taxpayers Union Foundation, which extrapolated from earlier data to estimate that there are about $50 billion in unpaid taxes on cryptocurrency gains. That rather hefty revenue estimate is worth noting for those who are concerned that the proposed information reporting is meant to shut down or dramatically curtail the cryptocurrency industry in the United States. If Congress really intended to do that, the revenue estimate should be quite a lot less than almost $30 billion.
The perception of the “suddenness” of the proposal in the infrastructure bill is inaccurate. Congress hasn’t spent much time deliberating about what information reporting should be required for cryptocurrencies, but the IRS put guidance under section 6045, which identifies who qualifies as a broker and tells them what they need to report, on its priority guidance plan in 2019. The question of tax information reporting hasn’t so much been a matter of “whether” but “when” for at least the past few years.
So what do the proposed rules mean for the cryptocurrency industry? The general information reporting rules require brokers to submit information reports to the IRS and customers. An earlier discussion draft of the infrastructure bill proposed amending section 6045(c)(1) to add to the definition of broker anyone who, for consideration, “is responsible for and regularly provides any service effectuating transfers of digital assets.” There was an uproar about this version of the definition because miners and decentralized exchanges would likely have fallen under it, but they don't have the information necessary to fulfill the reporting requirements, which led to changes over the weekend of July 31.
The bill, released August 1, settled on the definition as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The definition in section 6045 already includes anyone who regularly acts as a middleman regarding property. Digital currency is considered property, not currency, for tax purposes because of Notice 2014-21, 2014-16 IRB 938. The change to section 6045(c)(1) would mean that many more Forms 1099-B would be issued to owners of digital currency. The proposed bill also adds failure to file the information returns required to the list of returns that result in penalties under section 6724.
The infrastructure bill draft further proposes to define the term “digital asset” as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.” The Treasury secretary can specify what else is included in “similar technology.” Under the proposal, brokers are required to include in information reports the customer’s adjusted basis in the asset and whether any gain or loss on the asset is long-term or short-term.
Section 6045A, which covers the information required for transfers of covered securities to brokers, would have a new subsection (d) specifying that brokers who transfer a digital asset from an account the broker maintains to an account not maintained by the broker, or that has an address not associated with a person the broker knows or has reason to know is also a broker, must make an information return for that calendar year.
In addition to the new reporting requirement, section 6050I(d) would be changed to treat digital assets as cash. That would require 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 transaction or multiple related transactions to file Form 8300, "Report of Cash Payments Over $10,000 Received in a Trade or Business."
The changes would be in effect for returns and statements required to be filed after December 31, 2023. That gives a little bit of breathing room to the IRS and Treasury to develop regulations and other guidance that could provide some relief, or at least more certainty, to taxpayers and individuals required to submit reports.
One thing to keep in mind is that the statutory language isn’t the end of the story for the reporting requirements. It’s a major step, to be sure, but Congress doesn’t prepare the forms taxpayers will have to submit or typically issue many clarifications after the legislation passes, except technical corrections. Once the legislation is signed into law, the ball is in the IRS’s court as far as interpreting what Congress meant and putting that intent into effect through procedural mechanisms, such as Form 1099-B.
One of the lingering concerns is whether by calling cryptocurrencies cash and securities for purposes of these proposed information reporting requirements, the bill may portend an eventual shift in the tax treatment of cryptocurrency. Notice 2014-21 treats virtual currency as property for federal tax purposes, and the IRS has built all its guidance to date around that understanding. Further, the draft bill includes a rule of construction explaining that it doesn’t create an inference on whether any digital asset is property that is a specified security or any person is a broker under section 6045, but that rule applies only to the time before the effective date of the amendments. At least for now, it appears that a major overhaul in the tax treatment of cryptocurrencies beyond the addition of information reporting is not intended and seems unlikely anytime soon.