Senate infrastructure bill contains cryptocurrency reporting requirements

After a bumpy road, on August 10, the Senate passed a $550 billion bipartisan infrastructure bill (H.R. 3684) in a 69-30 vote. The bill’s primary tax revenue raising provision is centered on new reporting obligations for transactions in digital assets. These requirements, which do not apply until 2024, have been projected to raise $28 billion over ten years.

Uncertainty over how the breadth of the bill’s language will be interpreted is causing some to speculate that there may be compliance obligations outside of the institutions that facilitate the cryptocurrency market.

However, the infrastructure bill still needs to pass the House, which is an uncertain prospect although House Speaker Nancy Pelosi said she is “committing to passing the bipartisan infrastructure bill by September 27th.”

Broker reporting

The bill amends the definition of broker in section 6045 (which generally requires information reporting by brokers), to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” A digital asset is defined for this purpose as “any digital representation of value which is recorded on a cryptographically secured, distributed ledger or any similar technology as specified by the Secretary” except as otherwise provided by Treasury.

The bill also amends the definition of a specified security transaction (generally subject to broker reporting under section 6045) to include digital assets.

In addition, the bill includes an amendment to section 6045A, extending information reporting for transactions in covered securities to require brokers to provide information regarding transfers “of a covered security which is a digital asset.”

The statute does not specify any de minimis threshold for when reporting is required.

Cash reporting

The bill also includes an amendment to section 6045I applicable to cash transactions in excess of $10,000. That amendment treats digital assets as cash for this purpose.

Questions and amendments

Many questions have already been raised about the scope of the changes, which potentially widen the definition of broker to individuals or businesses engaging in cryptocurrency transactions that are not financial institutions, and also imposes separate reporting obligations on individuals engaging in large cryptocurrency transactions. For example, the definition of broker could include cryptocurrency miners and validators, as well as finance tech companies working with crypto protocols and wallet developers.

The scope of the cash reporting definition also raises questions as to what types of transactions would be covered, including how they would apply to decentralized finance.

Senator Wyden and others offered an amendment that would have removed some types of crypto validators and developers from the scope of the reporting obligations, by providing that no inference should be drawn that broker includes validators, hardware or software developers, or developers of crypto-assets or protocols to be used by other persons, under which the definition of broker for this purpose would be limited to entities with customers. Wyden’s amendment was not accepted. However, Senator Portman and others offered a separate amendment to narrow the definition of broker, less broad than Wyden’s exemption. This amendment also was not adopted.

Form 1040

The IRS has issued a July 2021, draft Form 1040, which included revisions to the question that has been on the form for the past two years regarding cryptocurrency assets. As proposed, the IRS will ask taxpayers whether they have received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency during the year. The new language is  narrower than the question that taxpayers have been required to answer for 2020 and 2019.

The IRS has not yet said what it would do with the Form 1040 question in the event the bill becomes law, but given the bill’s effective date, it seems likely that the Form 1040 question will remain.

Mazars’ Insight

As the cryptocurrency market grows, the IRS and Congress are seeking greater oversight and looking to ensure that the US federal government receives revenue from cryptocurrency transactions.

However, they are struggling to write rules in this area. Both individuals and businesses should be sensitive to the possibility of rules requiring information reporting for transactions in digital assets that may or may not appear to be the types of transactions that traditionally have been subject to reporting.

Please contact your Mazars professional for additional information.

Published on September 1, 2021