How Does the U.S. Infrastructure Bill Affect Tax Compliance for Digital Asset Brokers and Individuals?

What impact does the Infrastructure Bill have on the crypto industry? 

The Infrastructure Bill has many implications related to the crypto and digital assets industry including:

• Definition of digital assets

• Expanded definition of a broker

• Considers digital assets a covered security

• Increased 1099 reporting, including transfer reporting.

• New Form 8300 reporting requirements for businesses accepting payments of $10,000 or more in digital assets.

The IIJA introduced an entirely new transfer statement reporting concept and requirement. Under the new law whenever a digital asset is transferred from a digital asset broker to a non-broker, the digital asset broker will be required to file a new type of transfer statement directly with the IRS:

• The first provision expands information reporting requirements (Form 1099-B filings) to include transfers of digital assets. 

• The second provision adds digital assets to current rules that require corporations to report cash payments of over $10,000. Both of these provisions apply to returns required to be filed after December 31, 2023. 

While the biggest takeaway is increased, mandated Form 1099 and Form 8300 reporting, the urgent industry impact is the implementation of necessary operational changes required to capture personal tax information.

Exchanges who haven’t collected personal information, such as a Tax Identification Number (TIN), or reported in the past will be required to develop thorough onboarding and information reporting procedures.

It’s imperative that those who facilitate the movement of cryptocurrency collect and verify TIN’s on behalf of users transacting through their services. This may create a particularly difficult, but necessary, requirement for DeFi service providers to layer on know your customer (KYC) solutions.

How does the Infrastructure Bill change the definition of a broker? 

While the bill intends to clarify which transactions need to be reported on Form 1099, the definition of a broker has been one of its most controversial aspects.

Under its current language, a broker could be considered any of the following:

• Centralized digital asset exchanges

• Decentralized digital asset platforms

• Non-fungible token platforms

• Crypto and digital asset marketplace platforms

• Crypto miners (business and personal)

• Digital asset project developers (e.g., NFT projects) and technology providers

• DeFi protocol platforms

• Digital asset wallet providers

• Digital asset play-to-earn/gaming platforms

• DAOs

The Treasury and the IRS will need to clarify the definition of broker by amending IRC Section 6045. They also need to provide guidance on how those who fall under the definition will follow the new compliance and reporting requirements.

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.

It is currently pending, but 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.

To learn more about the Lummis-Gillibrand bill and its potential implications for crypto information reporting, see our article here.

What is the Infrastructure bill’s operational impact on crypto exchanges and platforms? 

US-based entities currently offering, or planning to offer, digital assets need to be prepared to comply with the new reporting rules; as of today, these rules will likely come into effect for tax year 2023.

As the definition of broker is expanding, exchanges will need to alter their onboarding procedures to be in compliance with Internal Revenue Code (IRC) Section 3406(d)-1(c)(2). Section 3406 requires a broker to collect a certified taxpayer identification number (TIN) for purposes of Form 1099-B reporting.

A certified TIN is provided by the payee under “penalties of perjury.” It’s commonly effectuated by utilizing Form W-9, or a substitute Form W-9, which collects:

• Payee’s name

• Address

• Tax Classification

• Tax Identification Number (TIN)

It’s then signed and dated under penalties of perjury that the information is true and correct.

The collection of this personal information may be a shift in the historical onboarding for some crypto platforms, but it's necessary for annual information reporting.

A significant challenge is the volume of account holders crypto platforms will need to properly document and report per IRC 3406 and 6045. Platforms won’t be able to execute simple changes for new account holders; the situation will involve a retroactive clean-up of all pre-existing account holders to ensure personal information is collected and verified.

Are there penalties for failure to report crypto transactions? 

Yes. The current penalty rates for failing to file correct Forms 1099 ranges from $50 to $270 per return with a maximum of approximately $3.3 million.

If there’s a determination of intentional disregard, the penalties start at $550 per return, and there’s no maximum penalty limitation. Information reporting penalties have historically increased over the years.

For more information, the IRS penalty schedule can be found here.

Reporting cryptocurrency gains is already required 

What’s often overlooked in the crypto reporting discussion is that individuals and entities transacting in crypto are already required to report gains. The IRS took this position in 2014, and taxpayers are required to report capital gains and losses on their tax returns.

So why has there been such a gap in corresponding information reporting?

If a taxpayer has gains from traditional equities, they receive a Form 1099-B that provides them with all of the necessary information to properly prepare their Form 8949 and corresponding Schedule D of Form 1040 or Form 1120.

However, if that same taxpayer has gains from cryptocurrency, some cryptocurrency exchanges have failed to issue a Form 1099-B to help their users account for those transactions.

As a practical matter, many of the leading cryptocurrency platforms have issued Forms 1099-B for several years, as the law, arguably, already requires exchanges to report cryptocurrency trades under the barter provision of Section 6045. Many cryptocurrency exchanges also are in the process of developing more user-friendly tax reporting solutions.

Will this end IRS summons on exchanges for taxpayer information?

Over the last few years, several exchanges have received IRS summons requesting taxpayer cryptocurrency activity. We anticipate the new information reporting requirements will end the need for the IRS to directly summon taxpayer data from exchanges.

These IRS summons typically target platforms that failed to report gains and losses for their users. Exchanges that have historically issued Forms 1099-B for cryptocurrency transactions haven’t had to deal with the operational costs associated with IRS summons. We anticipate IRS summons will start to decrease as more platforms come into accordance with information reporting requirements.

How does the bill impact the DeFi space? 

Now that decentralized digital asset platforms will be included within the definition of a broker, DeFi will be brought into scope for Form 1099-B reporting and all corresponding account holder documentation requirements discussed above. The collection of personal identifying information will be an industry shift for DeFi, as will the requirement to file Forms 1099 for taxable events.

In addition to Form 1099 reporting, the decentralized finance (DeFi) space should also be concerned about provisions in the bill around IRC Section 6050I, Report of Cash Payments Over $10,000 Received in a Trade or Business; it requires payments over $10,000 or more in cash to be reported on Form 8300. It's separate from broker reporting and under the Infrastructure Bill, IRC 6050I is amended so transfers of digital assets would be treated as cash and subject to Form 8300 reporting.

Form 8300 reporting includes:

• Sender and recipient’s name

• Addresses

• TINs

The information above must be sent to the IRS within 15 days of the transaction.

In a space that prizes anonymous transactions fueled through smart contracts, where both sender and recipient can remain unidentified, Form 8300 reporting poses real challenges for DeFi.

To read more about the SEC’s position on DeFi, read Commissioner Crenshaw’s statement originally published in The International Journal of Blockchain Law, Vol. 1, Nov. 2021.

How TaxBit can help

You don’t have to scramble for a solution. At TaxBit, our software, tax experts, and excellent customer service can help you solve and subvert roadblocks with new compliance protocols or reporting issues.

TaxBit has helped many of the leading cryptocurrency exchanges properly issue Forms 1099-B reporting cryptocurrency for several years. We anticipated that required compliance and reporting for digital assets would eventually align with traditional broker reporting.

Our systems are already programmed with a foundational treatment for digital asset trading akin to equity trading. We have tools to assist with calculating proceeds and optimizing cost basis. Based upon those calculations, our tools create Form 1099-B composites, and other appropriate Forms 1099, for the recipient then e-file for IRS-filing purposes.

TaxBit also recognizes the need to support your DeFi activity, and each day we're actively working on expanding DeFi support to popular blockchains.

TaxBit’s DeFi support allows you to sync in any transfers, trades, and approvals you’ve made on a DeFi platform involving ERC-20 tokens on the Ethereum network, or BEP-20 tokens on the Binance Smart Chain network.

Closing thoughts

• The pace of innovation in the digital asset innovation space is incredibly fast. 

• Cryptocurrency regulation is still in the early stages. It’s similar to the early days of the Internet becoming mainstream.

• Regulations will evolve. Clarification/understanding of the difference between a transaction and a transfer between entities, such as a transfer to a custodian, will eventually be defined.

• Organizations should focus their efforts on processes and procedures involving what they should report on Form 1099-B. It should be looked at holistically process-wise so Form 1099-B can be created only when necessary. 

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