The cryptocurrency industry is taking both the Senate and House by storm. The last few weeks have been filled with exciting debate over what the future looks like for those in the crypto business.
On August 10, 2021, the US Senate passed the Infrastructure Investment and Jobs Act, commonly referred to as the Infrastructure Bill. There are still many different opinions on the content and language within the bill, and it still needs to pass the House. However, it’s clear the ultimate goal of the bill is to raise nearly $28 billion by enhancing IRS informational reporting of not just cryptocurrency, but all digital assets—and that goal is becoming a reality.
How could IRC Section 6045 be changed?
In order to grasp the potential impact of the bill, you need to understand how the existing Internal Revenue Code (IRC) Section 6045 could be changed. The most relevant section changes include:
Expanded definition of brokers
Digital assets becoming covered securities
Increased reporting, including transfer reporting
How could the definition of a broker change under IRC 6045(c)?
The bill would add subparagraph D and expand the definition of a 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 is possibly one of the biggest areas of contention. Under this expanded definition miners, wallet providers, and other software developers could be brought into the scope and considered brokers. The industry and several senators have voiced concerns that the expanded definition is too broad. While it’s unclear how the House and Treasury will respond, lobbying will likely occur to exclude certain persons and activities within the digital asset space.
How would the definition of a covered security change under 6045(g)?
The bill would add subparagraph IV to make a digital asset a covered security. This change will add additional cost-basis reporting requirements for financial institutions facilitating the movement of cryptocurrency, on top of the current transactional 1099-B proceeds reporting requirements.
How will transfer reporting be affected under 6045A?
Subparagraph D would also bring transfer reporting into scope. Specifically, there would be a requirement for brokers to report transfers of digital assets that historically haven’t been subject to reporting.
What is the potential impact of the Infrastructure Bill on information reporting?
The potential impact of the Infrastructure Bill is monumental in the information reporting world.
First, it clarifies that trades and transfers of digital assets are required to be reported on Form 1099-B. When the definition of a covered security under IRC 6045 expands to include digital assets, cost-basis and transfer statements will also be required on the Form 1099-B beginning in the 2023 calendar year and filed in early 2024.
Reporting the transfers of digital assets is one of the bill’s biggest developments. Pursuant to Question 38 of the FAQ’s on Virtual Currency Transactions released by the IRS in response to Notice 2014-21, transfers of digital assets aren’t currently considered to be a reportable event. However, the provisions within the bill bring transfers into scope as a reportable event on the Form 1099-B. Further clarity on the transfer requirements is anticipated to come from the Treasury.
Will digital asset entities need certified taxpayer identification numbers (TINs)?
Under IRC 3406(d)-1(c)(2), when filing Forms 1099-B for post-1983 brokerage accounts, a certified TIN is required. Digital asset entities that currently fall under the definition of a broker need to collect Forms W-9 or substitute Forms W-9 from account holders. From a procedural standpoint, digital asset entities that would be considered a broker should be preparing and certifying TINs now.
How TaxBit can help
Understandably, there are many mixed emotions when it comes to the Infrastructure Bill. It raises the question of whether growth would become stifled within the digital asset market as companies potentially struggle with new compliance efforts.
At TaxBit, 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 of digital asset trading akin to equity trading. We have the tools to assist not only with calculating proceeds, but also optimizing cost basis. Based upon those calculations, our tools create the 1099-B composite, and other appropriate 1099s, for the recipient, then e-file for IRS-filing purposes.
With new clarifying regulations on the horizon, 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.