Infrastructure Bill Passes in the Senate - The Implications for Cryptocurrency Reporting
On August 10th, the US Senate passed the $1.2 trillion infrastructure bill without any of the proposed amendments on crypto tax reporting that had held up the vote for over a week. The primary purpose of the bill is to bolster the US economy through the creation of 2 million jobs per year over the next decade. However, a portion of the costs will be offset by bolstering tax enforcement on cryptocurrencies. To help fund the estimated $550 billion in new spending, the bill includes provisions that would require reporting on certain cryptocurrency transactions.
The contentious language in the bill requires crypto "brokers" to report customer information including transactions to the Internal Revenue Service. However, the definition of a 'broker' includes non-financial intermediaries like miners, network validators, and other software and services providers. These entities aren't considered financial brokers in any practical sense and as a result they wouldn't have the data to report the tax information that would be required under the law. A group of senators attempted to amend the infrastructure bill by narrowing the definition of a broker to ensure that only cryptocurrency exchanges would be covered by the new tax reporting rules. However, despite support for the compromise language from both competing camps of senators and the administration, the Senate could not come to an agreement on amendment votes and Senator Shelby blocked all further amendments to the infrastructure bill, including the compromise measure crypto reporting amendment. As a result, the language as passed in the Senate bill is the original language in the bill.
Definition of "broker" and Broker Reporting
There is a large concern about the ability of miners, stakers and software developers and their ability to comply. IRC Section 6045 would be amended to define a broker as including "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." The language in this provision is too broad and would unintentionally bring entities like blockchain validators, sellers of hardware and software wallets and software protocol developers into scope. Further, the IRC Section regarding transfers from one account to another between brokers, would be expanded to also cover the transfer of digital assets. In addition, the new Section 6045A(d) would require a broker to report transfers of digital assets to an account or address not maintained by a broker such as a private wallet.
The bill still needs to be passed by the House and signed into law by the President. In addition, the IRS would also be required to issue new regulations and draft changes to broker reporting. The IRS would also need to update information reporting forms or create new ones. The timeline before a digital asset is subject to cost basis reporting is January 1, 2023. So, while there is still some time before crypto tax reporting is required, crypto exchanges should start to think about what internal changes they will require in order to ensure they are able to comply with cost basis reporting. In addition, to cost basis functionality, exchanges will also need to rethink their onboarding process and ensure they are now collecting certified TINs.
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