U.S. Treasury Proposals - Enhanced Tax Information Reporting Impact on Cryptos
Enhanced tax information reporting has become one of the pillars of the Biden Administration's efforts to close the tax gap and bring in additional revenue for its legislative agenda.
The Administration's proposed tax information reporting changes are significant and are detailed to some extent in the U.S. Treasury's recently released General Explanations of the Administration's Fiscal Year 2022 Revenue Proposals, commonly referred to as the "green book."
These proposed changes, if enacted, would impact banks and other financial institutions broadly and, in particular, would provide significant new reporting rules for institutions facilitating transactions in cryptocurrencies.
Reporting Financial Account Inflows and Outflows
A signature proposal in the green book is a proposal for "comprehensive financial account reporting." Comprehensive financial account reporting would require financial institutions to "report gross inflows and outflows" from financial accounts, including bank, loan and investment accounts. The proposal envisions a breakdown for flow types, including for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. The reporting is subject to a de minimis $600 flow or fair market value threshold.
The target of the enhanced financial account reporting appears to be sole proprietorship and other business income and expenses. These rules extend to payment settlement entities as well that report on Form 1099-K. In particular, payment settlement entities would be required to report not only gross receipts but also gross purchases, physical cash, as well as payments to and from foreign accounts, and transfer inflows and outflows.
Moreover, the green book tax information reporting proposals evidence a deep concern by the Administration of potential tax evasion through the holding of, and transactions in, cryptocurrency and dedicate specific rules to address this concern.
First, the comprehensive financial account reporting of inflows and outflows applies to crypto asset exchanges and custodians.
Separately, reporting would also apply where a taxpayer buys crypto assets from one broker and transfers the crypto asset to another broker. It is unclear whether this may be similar to the broker transfer statement reporting that is currently required when securities are transferred between brokers but appears similar and may offer a mechanism for tracking tax basis in crypto assets.
Third, businesses that receive crypto assets in transactions that have a fair market value that exceed $10,000 would be required to report.
Enhanced FATCA-Type Reporting on Crypto Assets
Finally, the green book also proposes enhanced broker reporting on crypto asset transactions with respect to substantial non-U.S. beneficial owners of certain passive entity account holders. This requirement may require significant review and build-out of new tax information reporting processes.
Under existing Foreign Account Tax Compliance Act (FATCA) requirements, reporting is generally required on substantial U.S. owners of certain passive entities, but there is no corresponding reporting on non-U.S. owners.
The green book notes that obtaining such information would "allow the United States to share such information on an automatic basis with appropriate partner jurisdictions." The intention is that this would then allow the IRS to reciprocally receive information on U.S. taxpayers that directly or through passive entities engage in crypto asset transactions outside the United States through a global automatic exchange of information framework (e.g., FATCA).
The enhanced broker crypto reporting would require "brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker."
From a process perspective, identification of such non-U.S. beneficial owners of passive entities would likely require new tax certifications and validation processes.
In addition, the proposal indicates that this enhanced reporting may require reporting of proceeds from the sale of crypto assets. If so, this would be inconsistent with the general rule that sale proceeds from personal property sales are generally not reportable when paid to a non-U.S. person. With the advent of broker withholding and associated reporting on sales of publicly traded partnerships under section 1446(f) beginning in 2022, however, we may be headed in the direction of an asset-specific proceeds reporting regime.
At this point, it is unclear whether either the comprehensive financial account reporting of account flows or the broker crypto reporting of non-U.S. beneficial owner of passive entities would be enforced through a withholding mechanism, whether it be backup withholding or FATCA withholding. But withholding agents will need to bear in mind potential withholding process impact in addition to reporting changes.
These enhanced financial account reporting is proposed to be effective for tax years beginning after December 31, 2022, and the proposal for enhanced broker crypto reporting on non-U.S. owners of certain passive entities is proposed to be effective for returns required to be filed after December 31, 2022.
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