The bipartisan bill creates a comprehensive framework for the classification and regulation of digital assets.
On June 7, 2022, Senators Lummis and Gillibrand introduced a bipartisan bill creating a comprehensive framework for the classification and regulation of digital assets. The bill includes provisions directed at the substantive tax treatment of digital assets and one section making changes to the tax information reporting rules for digital assets.
The bill has a long way to travel before it becomes law, and nothing is likely to happen in the near future. However, businesses currently preparing to implement the information reporting rules enacted in the Infrastructure Investment and Jobs Act (IIJA) passed in November 2021 may be wondering if or how this bill changes anything, thus a deeper dive is warranted. Before understanding the Lummis-Gillibrand Bill's impact on the digital asset industry, it is important to understand the current law under IIJA.
How does the IIJA impact information reporting for digital assets?
In November 2021, the IIJA was signed into law. That bill amended existing law to expressly require four things relating to tax information reporting on digital assets.
Digital asset brokers are required to file Forms 1099 with the IRS reporting on the disposition (sale or exchange) of digital assets by their customers, including both the sale proceeds and acquisition cost of the sold asset
Digital asset brokers are required to share (through transfer statements) acquisition cost-basis information with other brokers when a digital asset is transferred from one broker to another
Digital asset brokers are required to share (through some yet unidentified process) acquisition cost-basis information with the IRS when a digital asset is transferred from one broker to a non-broker
Persons (individuals or entities) who received $10,000 in value of digital assets as payment for goods or services in a trade or business will need to report information, including the customer’s identity, on a Form 8300 about the transaction to the IRS
What is Form 1099 broker reporting for digital assets?
Historically, brokers that facilitate transactions in property between individuals are required to report information about those transactions, including the proceeds of the property given up by the seller. Since 2011, for securities, that reporting typically includes the acquisition cost basis of the security that was disposed of. Where the disposed of security was acquired at one broker and sold at a second broker, cost-basis information is provided to the selling broker through information shared between the brokers upon the transfer of the security.
In the IIJA, Congress expanded traditional broker information reporting requirements to digital asset brokers. For additional detail on how the IIJA defines a broker and digital assets, please refer to our articles here and here.
The timelines under the IIJA come into effect on January 1, 2024. Specifically, digital asset brokers will be required to file Forms 1099 with the IRS beginning in January 2024 for transactions that occurred in 2023.
To enable cost-basis reporting on Forms 1099, digital asset brokers will need to begin issuing traditional transfer statements when assets are transferred to another broker. The IIJA introduced a secondary transfer statement requirement - one that is entirely novel. The IIJA imposes an obligation on brokers to issue transfer statements when a digital asset is transferred to a wallet or non-broker destination.
How would the Lummis-Gillibrand bill impact information reporting?
The Lummis-Gillibrand bill proposes a few changes to the information reporting rules for digital assets that were established in IIJA.
It would change the definition of digital asset broker to make it narrower
It would change the definition of digital assets to make it more detailed
It would push the information return reporting and cost-basis sharing deadlines back two years
It would make no change to the Form 8300 requirements
The Lummis-Gillibrand bill would change the definition of digital asset broker to narrow it by focusing on persons who affect sales of digital assets for customers. Consistent with the statements by the Treasury Department, this definition seems directed at removing miners and stakers from being treated as brokers.
The Lummis-Gillibrand bill would change the definition of digital assets to make it more specific. The IIJA defined a digital as a "digital representation of value." At the same time, the Lummis-Gillibrand bill changes it to be an "electronically native asset that confers economic, proprietary, or access rights or powers." Despite their slight differences, both definitions include a catch-all statement that would consist of "any similar technology," so it is unclear how the definitions differ at a practical level.
The most significant change resulting from the Lummis-Gillibrand bill concerning information reporting is the deferral of information reporting and cost-basis tracking for two years. Form 1099 filing would be delayed from January 1, 2024 (relating to the 2023 tax year) until January 1, 2026 (relating to the 2025 tax year). Cost-basis transfer among brokers would begin on January 1, 2025, rather than January 1, 2023. Finally, cost-basis reporting to the IRS for broker-to-non-broker transfers would begin on January 1, 2026 (for the 2025 tax year) rather than January 1, 2024 (for the 2023 tax year).
Finally, the Lummis-Gillibrand bill would not make any legislative changes to the Form 8300 requirements passed in the IIJA. Still, it would mandate that the IRS and Treasury Department adopt guidance (regulations) relating to the IIJA provisions within one year of passage Lummis-Gillibrand bill.
What steps should I take in light of the Lummis-Gillibrand bill?
Including the Lummis-Gillibrand bill, three items addressing digital asset information reporting are taking shape—the IIJA, Treasury regulations, and the Lummis-Gillibrand bill.
Of these three, the Lummis-Gillibrand bill is, at this point, nothing more than a proposed bill, which even Sens. Lummis and Gillibrand have recognized is unlikely to pass into law this year. Therefore, it is unlikely to impact the reporting requirements and dates established in the IIJA. Under the IIJA, data collection and cost-basis sharing among brokers begins on January 1, 2023.
The proposed changes to information reporting in the Lummis-Gillibrand bill are only one provision in a comprehensive piece of proposed legislation mainly directed at sorting out how digital assets will be treated for securities and commodities purposes. Moreover, the changes appear to be a recent addition just before the bill's release, as they were not in an earlier draft of the bill that was made public here.
Currently, the IIJA provisions addressing information reporting govern what needs to be reported and when that reporting begins. The IRS and Treasury Department are expected to release proposed regulations in the near future that will possibly refine some of what was included in IIJA, such as a precise definition of a digital asset broker. Still, they, more importantly, will provide specifics on how the information reporting will be implemented, including what information needs to be collected and reported.
Cost-basis reporting and data collection necessary for information reporting will begin on January 1, 2023 under the IIJA, making that the most applicable date to look at right now.
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