August 19, 2021
Senate-passed infrastructure bill would impose information-reporting requirements on sales of cryptocurrency and other digital assets
Cryptocurrency and other "digital assets" sold by customers of "brokers" would be subject to Form 1099-B reporting and cost-basis reporting if the Infrastructure Investment and Jobs Act (the bill) becomes law. The bill, which passed the Senate on August 10, 2021, would amend the Internal Revenue Code to:
The amendments would be effective for information returns filed in 2024 for the 2023 calendar year.
Expanded definition of broker
The bill would amend IRC Section 6045 to 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 definition would include, for example, cryptocurrency exchanges, which function in many ways like broker-dealers do in the securities markets.
EY observes: The digital asset industry has expressed concern that the revised definition of a broker could be interpreted to require reporting by cryptocurrency "miners" or maintainers of "decentralized finance" or "DeFi" platforms, even though they do not have the information required to report properly. Miners validate transactions so that transfers can be entered on the blockchain, but they generally know nothing about the underlying transaction or its parties. DeFi platforms execute transfers of cryptocurrency based on rules established in a "smart contract," without the need for human intervention. Two amendments were offered in the Senate to address this issue, but neither was included in the version of the bill that was sent to the House of Representatives. Treasury, however, just released a statement that should alleviate these concerns.
Digital assets as a new asset class
The bill defines a digital asset as "any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary." This definition would apply to common cryptocurrencies, such as bitcoin and ether, that are recorded on a blockchain.
EY observes: This definition could extend beyond cryptocurrencies. It also could apply to other digital goods, such as a weapon or a territory used in a role-playing game or a "non-fungible token" (NFT) representing a work of art or a basketball highlight, provided the asset is (1) a "digital representation of value"; and (2) recorded on a blockchain or similar ledger.
Basis reporting for digital assets
The bill would treat digital assets as "specified securities," effective January 1, 2023. This treatment would require brokers to track and adjust the customer's cost basis, presumably like stock and debt today, for digital assets purchased on or after that date.
EY observes: The treatment of digital assets as securities for information reporting purposes would not affect the current tax treatment of securities generally.
Transfers of digital assets
A securities broker who transfers a "specified security" to another broker must send a transfer statement that provides the customer's cost basis and holding period to the other broker. Nearly all securities transfers result in a transfer statement because transfers outside of the custodial system are rare. Transfer statements would be required for cryptocurrency as well if the bill is enacted, but the nature of transfers in the cryptocurrency market is quite different. Customers frequently move tokens from an exchange into their own electronic wallets. Accordingly, many transfers will not go to another broker, and the basis information would be lost. To prevent this loss, the bill would amend IRC Section 6045A to require a broker that transfers digital assets to anyone other than another broker to file an information return with the IRS that includes the information that otherwise would have been in a transfer statement.
EY observes: Securities brokers had to create a transfer statement system and data structures when cost-basis reporting first became effective in 2011, but the IRS never published an official form. The creation of an official transfer statement form for digital assets may influence how the securities industry reports other transfers.
Treatment of existing digital assets
The bill includes a "rule of construction" specifying that its amendments do not infer, one way or the other, whether "any person is a broker" or "any digital asset is … a specified security," before January 1, 2023.
EY observes: This language seems to leave the door open for the IRS to challenge nonreporting in prior years, especially for tokens that may be characterized as securities under existing law.
Form W-9 collection
The bill would require brokers to obtain a Form W-9, Request for Taxpayer Identification Number and Certification, from their US customers — both new and preexisting — or withhold 24% of the proceeds of sales (or risk being held liable for failing to do so). Current practice varies widely across the industry, but it appears that most exchanges do not collect Forms W-9 at onboarding. Obtaining tax forms for existing accounts would be one of the largest challenges for the exchanges in implementing these rules. In addition, brokers would need to implement processes to respond to notifications of name/TIN mismatches from the IRS.
Existing regulations require sales of securities to be reported only to the extent they are conducted "for cash." By classifying cryptocurrencies as specified securities, the bill would require a sale of bitcoin for US dollars to be reported. The bill does not, however, address the common scenario of trading one form of cryptocurrency for another — bitcoin for litecoin, for example. As such, it is unclear whether the bill would be interpreted to require reporting of such trades.
Digital assets treated as cash
The bill would modify IRC Section 6050I(a) to treat digital assets as "cash." IRC Section 6050I requires persons engaged in a trade or business to report to the IRS on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, when they receive more than $10,000 in one transaction (or multiple related transactions). As noted, the bill defines digital asset broadly, so this requirement may include digital assets besides cryptocurrency.
EY observes: Companies that are now considering whether to accept cryptocurrency as a form of payment should factor this potentially burdensome reporting requirement into their deliberations.