The US Senate released legislative text of a 2,702-page bipartisan infrastructure bill (HR 3684) on August 1, 2021. It includes proposed tax law changes as well other budgetary offsets. One of the biggest revenue raisers is contained in Section 80603 of the bill “Information Reporting for Brokers and Digital Assets” (to be found on page 2,433). As its title suggests, this provision pertains to the requirement for 3d party information reporting to the Internal Revenue Service (IRS) with respect to digital assets such as cryptocurrency. This proposal is estimated to raise approximately US$28 billion over a 10-year period. No new taxes are being imposed on digital assets – it is reporting by “brokers” that is the name of the game here.
In addition to raising badly needed revenue, this reporting will enhance the ability of the IRS to share information with foreign countries. It will strengthen the relationships the US has with foreign jurisdictions under information exchange agreements. If the US government has significant information on crypto transactions effected by foreigners on US exchanges (even if the crypto account is held through entities), the foreign country may be more willing to give information to the US about US taxpayers with crypto in the foreign country. My tax blog post here discusses this aspect of the reporting provisions as envisaged by the Biden Administration. The proposed information reporting rules will generally be effective for returns and statements required to be filed or furnished commencing January 1, 2024.
Definition of “Broker”
Essentially the bill would expand the definition of “broker” to include “ any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This would make the current “broker” reporting rules apply to digital asset transactions. The current reporting rules apply to stock trades and require brokers to provide tax forms to the IRS and customers showing the taxpayer name, identity number, address and gross proceeds of transactions. Such 3d party reporting has proven to be a tried and true method of getting taxpayers to report income accurately. The Senate bill would also require business transactions involving more than $10,000 in cryptocurrency to be reported to the IRS, adding digital coins to the current reporting rules that apply to certain large cash payments.
There has been significant controversy over the bill’s definition of the term “broker” and lobbying has been fierce on behalf of blockchain networks, crypto investors and other segments of the digital asset industry. The definition is viewed as too broad and could potentially include intermediaries that are involved in digital transactions but who take neither control over digital assets nor collect personal information about the owners of these assets. These parties cannot report tax data to the IRS if they do not have access to the information.
Clarifying Amendment to Definition of “Broker” Blocked in Senate
After negotiations between several Republicans and Democrats, an amendment was introduced on August 4 to address the definition matter in an attempt to balance the tax law concerns without harming this nascent technology or stifling innovation. The amendment proposed language specifying that reporting obligations would not apply to anyone engaging in the business of validating cryptocurrency transactions; to miners, to those developing “wallets” (hardware or software to control private keys used to access digital coins); or to those developing digital assets for others who are not customers.
In a blow to the crypto industry, this proposed change was blocked in the Senate on Monday. This leaves intact the broad language currently still in the legislation that has now passed the Senate. Nevertheless, the crypto language is still quite a way from becoming law. Now the legislation will be taken up in the House, where changes can be made. Assuming the cryptocurrency provisions are eventually signed into law, the IRS will be drafting and issuing Treasury Regulations detailing how the provisions shall work. The language in the text of the bill is not specific, and it is anyone’s guess how the IRS will interpret it. Watch this space for more developments.
Senator Ted Cruz recently stressed that the proposal is very poorly-written and short-sighted, and that Congress should not be regulating an industry it does not understand. He believes that if enacted, the regulatory framework will be “destroying billions of dollars worth of industry in the United States… destroying jobs… and …sending them overseas.” Sounds right to me!
More to Come! Crypto – on the Radar, in the Cross-Hairs
Many tax issues arise with digital assets. The debate over the “broker” reporting rules has shown that lawmakers realize there is a lot at stake and that so much more needs to be understood about the industry. A particular issue we may see addressed in the not too distant future involves the so-called “wash-sale” rules, which currently do not appear to apply to cryptocurrencies.
When a taxpayer trades stocks, the “wash-sale” rules contained in IRC Section 1091 restrict the ability to use losses to offset gains when the taxpayer buys and sells the same stock within 30 days. The rules prevent taxpayers from generating losses simply to reduce their taxes. There are no wash-sale rules in place for trading of cryptocurrencies since the rules apply only to “shares of stock or securities.” You can sell your bitcoin at a loss, and buy it right back, harvesting tax losses as you go. The administration is on to this and is contemplating how to fix this loophole.
Posted August 12, 2021 & updated August 17.
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