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What the US infrastructure bill means for cryptocurrency brokers and owners | Part II

On 15 November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act ("IIJA"). This bipartisan infrastructure package dedicates over $1.2 Trillion to upgrading America's infrastructure over the next decade. Included in the package are new authorities for the US Internal Revenue Service and Treasury Department, giving them the power to establish tax reporting rules for cryptocurrency transactions starting in 2023.

The provision entitled "Information Reporting for Brokers and Digital Assets" in the IIJA is designed to bolster tax-enforcement efforts and help pay for the spending authorized by the bill. The bill mandates that a broker will have to report any digital-asset transfer moved to the account of an unknown person or address. The new rules stand to put tremendous emphasis on a broker's Know Your Customer (KYC) and tax information reporting systems. To lower reporting obligations, a firm will need to have a robust means of identifying customers and accounts that receive transfers.

Passage of the IIJA followed the Report on Stablecoins that was issued by the Presidential Working Group Report on Capital Markets (PWG) which called for stablecoin issuers to be regulated as a depository institution. This report called on Congress to pass legislation subjecting these firms to prudential supervision and in the intervening period, it outlined existing enforcement authority possessed by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and the Financial Stability Oversight Council (FSOC).

These two events taken together present a sea change in the regulatory expectations for crypto brokers and firms dealing in digital assets. Going forward, these firms will need to have extensive KYC, AML and tax reporting infrastructure. Additionally, if they are issuing stablecoins, they should be prepared to meet the regulatory burdens that are expected of depository institutions including capital requirements and strict disclosure rules.

Overview of the cryptocurrency tax rules included in the IIJA

The IRS has historically treated cryptocurrency and other digital assets as property, applying general property-tax-transaction principles. Many studies have indicated that over the years appropriate taxes have not been paid by holders of digital assets in a substantial number of cryptocurrency transactions.

Stemming from this, the information-reporting provision of the Senate infrastructure bill aims to bring transparency to the market while also giving taxpayers greater certainty as to their taxable gains and losses related to the transaction of digital assets.

Each time a unit of cryptocurrency is traded it creates a taxable event. This occurs whether the cryptocurrency is converted into a fiat currency like the US dollar or another cryptocurrency (which is treated as the sale of one digital asset and corresponding purchase of another). This is important if the holder of the digital asset had a substantially lower basis in the asset when they purchased it than when they sold it. The appreciation is taxable, depending on how long the owner holds the asset, either at the short-term or long-term capital gains rate. Conversely, losses on digital assets can be used to offset other taxable gains accrued in a year[CL1] .[1]

To bring transparency to the market and increase the visibility of taxable receipts due to the Treasury Department, the rules in the infrastructure bill mandate that brokers must report all digital-asset transactions "from an account maintained by such broker to an account which is not maintained by, or an address not associated with, a person that such broker knows or has reason to know is also a broker." This is meant to be accomplished through an annual tax report, such as one in the Form 1099 series or another form the IRS may design to meet the new reporting objective. The reporting requirements become effective January 1, 2023 and will be required for all tax returns filed for the taxable year.

While some within in the industry fear that this provision could lead to further regulation of digital assets outside the scope of the bill, there is a rule of construction embedded within the section designed to limit its impact. The rule of construction states that:

"Nothing in this section or the amendments made by this section shall be construed to create any inference, for any period prior to the effective date of such amendments, with respect to —

(1) whether any person is a broker under section 6045(c)(1) of the Internal Revenue Code of 1986, or

(2) whether any digital asset is property which is a specified security under section 6045(g)(3)(B) of such Code."

Definition of "digital-asset broker" continues to generate controversy

A particularly contentious part of the provision relates to the definition of a "digital-asset broker." The provision states that a digital-asset broker will constitute, "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."

Many prominent proponents of cryptocurrency and digital assets fear this definition is too broad and may potentially capture cryptocurrency miners and software developers—harming innovation in the sector and possibly causing software developers to move overseas.

An intense cryptocurrency lobbying effort sought to amend the provision to explicitly exempt miners, validators, and software developers. While this effort did produce compromise language (endorsed by Treasury Secretary Janet Yellen), the amendment did not make it into the bill prior to passage in the Senate and House.

Despite the compromise language failing to make it into the IIJA prior to it becoming law, broad application of the provision may still be avoided. As with all federal rules, after the Treasury Department issues regulations to implement the law, there will be a period during which interested parties can comment and give their view. Broad application would only happen if the Treasury Department takes a very wide view when writing the implementing regulations. This would be inconsistent with their public support of the compromise language that was specifically designed to exempt software developers, validators, and miners.

PWG issues Report on Stablecoins which calls for stablecoin issuers to be regulated as depository institutions

The PWG is a working group that is chaired by the Treasury Secretary and has representatives of all the major financial regulators that report to the Secretary including the Chairmen of the SEC, the Chair of CFTC, the head of the Federal Deposit Insurance Corporation (FDIC), the Comptroller of Currency (OCC) and representatives from the Federal Reserve. Earlier this year Secretary Yellen chaired a public meeting to discuss the systemic risks posed by stablecoins and committed to releasing a public report that would outline the administrations approach to regulating this class of digital assets.

This report was eagerly anticipated for the signals it would give to stablecoin issuers as to what they can expect from the Biden administration. The findings of the report represent close to worst case scenario for these companies. In the report the PWG outlined the immense risks posed by stablecoins and how a potential run on an individual stablecoin could pose systemic risk to the financial system.

The report also highlighted the current regulatory gaps that exist, posing challenges for regulators to address the risks identified in the report. Its main recommendation is for Congress to pass legislation designating these companies as depository institutions subjecting them to prudential regulations by the OCC and FDIC. In the intervening period prior to legislation being signed into law, the report highlights the existing enforcement authorities of the SEC and CFTC and how they can be used to address the risks posed by stablecoins.

Most importantly the report highlighted the role the FSOC could play in addressing the systemic risks posed by these assets. The FSOC was created by the Dodd-Frank Act and is a council led by the Treasury Secretary that is empowered to identify and regulate firms that pose a systemic risk to the financial system. The report stated clearly that the FSOC was in position to designate stablecoin issuers as systemically important financial institutions if Congress and the regulatory agencies fail to act. Such a designation would subject those firms to prudential supervision, even in lieu of an act of Congress.

What do digital-asset brokers need to know?

US-based financial firms, such as cryptocurrency exchanges and banks, planning to offer digital assets to their clients should be prepared to comply with the new reporting rules. Foreign exchanges and financial firms that allow US clients to transact digital assets are also expected to be subject to the regulations. These firms will have to send outreach communications to all of their US clients informing them of the new tax-reporting requirements. Stablecoin issuers in particular should be prepared to be regulated as depository institutions and will need to have on hand the expertise, compliance and technological infrastructure to meet the rigorous standards expected of banking institutions.

Firms will also have to upgrade their onboarding processes and systems to ensure that they can properly identify their clients, their accounts and addresses, the beneficial owners of these accounts, and the accounts and addresses to which their clients will be transferring digital assets. This will be of paramount importance since reporting obligations would kick in at the point when a broker is unaware of the account or address to which the digital asset is being transferred. New Procedures will be required to flag and manage transactions when a client, beneficial owner, or asset transfer involves an individual or entity that may be a sanctioned or represent political or anti-money laundering risk.

Cryptocurrency, by its nature, is opaque and subject to heightened money laundering risks because most transactions and digital wallets are anonymized. This creates tremendous burdens on firms and law enforcement agencies seeking to enforce Anti-Money Laundering (AML) and Counter-Terrorism Finance (CFT) laws.

Cryptocurrency, given its use to facilitate illegal activity and tax evasion (as per the IRS), currently has a critical detection challenge. Despite constituting a relatively small portion of today's business income, cryptocurrency transactions are likely to rise in importance in the next decade. Exchanges and other financial firms offering digital assets are broadly subjected to the US Bank Secrecy Act and AML rules. So, they will not only need to ensure they are properly identifying account owners and beneficial owners but also able to handle the potential influx of volumes and remediation stemming from new measures. Broader changes in AML/CFT regulations are likely to come in H2 2021, with cryptocurrency transactions valued over $10,000 subject to heightened reporting.

Additionally, firms must upgrade their tax-preparation capabilities including the possibility of cost basis calculations, since they will have to produce increased volumes of Forms 1099 issued to all their US account holders on annual basis after 2023. There is also a risk the IRS could expand the information reporting to transfers by non-US clients in the final regulations. In addition, certified TINs are currently generally required for brokerage accounts (established after 1983), and it is reasonable to expect that this would be applicable to reporting for digital assets as well. Reg. 31.3406(d)-1(c)(2) which delineates the requirement for certified TINs is not entirely clear as it references a "brokerage account." Due to the expanded definition of a broker it seems reasonable to conclude an account opened with someone that falls into the definition of broker for purposes of section 6045 will require a certified TIN. The collection of certified TINs will likely require a significant remediation effort. Brokers cannot simply make prospective changes to their onboarding process.

Are NFTs being treated differently?

NFTs would also be included in the definition of digital assets and presumably they will be subject to cost basis reporting as well. One area to clarify are NFT marketplaces. The NFT marketplace may be organized in different ways, where an intermediary may step in to process payments and others where payments are peer-to-peer. The structure may matter as to whether and what information reporting rules apply. Potentially for these marketplaces, you could see third party payment processor (Form 1099-K) filing obligations, or broker reporting or possibly application of barter exchange rules. So it will be interesting to see the direction the IRS takes when issuing final regulations.

For stablecoin issuers, they are faced with the prosect of having to comply with the requirements embedded in the IIJA as well as the additional requirements expected of depository institutions. This prospect has the potential to have a chilling effect on new stablecoin issuers, discouraging new entrants in the market. It is far less likely existing firms will consider issuing a stablecoin if they believed that doing so would subject the firm to prudential regulation.

Wash sales and cost-basis

Another area of great concern has to do with wash sales. The current thinking from practitioners is that wash sales rules do not currently apply to common cryptocurrencies as they are not stock or securities. And while not necessarily covered under IIJA, there is a proposal in the Build Back Better Act under consideration in Congress currently that would expand wash sales rules to cover digital assets among other items. The provision also expands the application of wash sales to actions by related persons. The proposed amendments are to be effective for dispositions occurring after December 31, 2021. Wash sales would certainly increase the difficulty for conducting cost basis reporting for crypto assets. However, for Form 1099-B reporting purposes, broker wash sale reporting is currently limited to wash sales within the same account. Note that this effective date differs from the effective date for when digital assets are treated as covered securities for cost basis reporting (digital assets acquired on or after January 1, 2023). It will be useful to monitor developments on the Build Back Better Act to see whether and when the expanded wash sales provision may be enacted.

What do digital-asset owners need to know?

Owners of cryptocurrency and digital assets should familiarize themselves with the tax rules, specifically regarding the basis used to establish their assets for any taxable gain or loss. They should be prepared to receive a Form 1099 (or other applicable form drafted by the IRS) from all brokers making transactions with their digital assets and should be prepared to incorporate gains or losses into annual tax returns.

Most important for the owners of digital assets, is having a clear understanding the evolving tax rules around emerging assets. Since 2019, the IRS has made clear that it considers "hard forks" to be taxable events (notable given Ethereum's London hard fork that took place on 5 August 2021). Further, the IRS has published FAQs reminding taxpayers that crypto transactions remain reportable by the taxpayer, regardless of receipt of a Form 1099, W-2, etc. This is in addition to the IRS specifically asking on Form 1040 whether a taxpayer has at any time during a tax year received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.

Cryptocurrency owners should also be prepared to undergo more KYC reviews by the firms with which they transact. This will include being involved in periodic refresh processes firms will utilize to ensure they have accurate, up-to-date customer data. Owners should be prepared to provide current information on their location, tax status, citizenship, and other information needed to comply with AML and CFT regulations.

The days of anonymously transacting digital assets through American financial firms and digital-currency brokers would seem to be over.

How IHS Markit Can Help

The wide definition of "broker" under Infrastructure Investment and Jobs Act has the potential to create reporting obligations for almost every financial firm transacting in digital assets. Firms should be prepared for these reporting rules by addressing the systems they utilize for client outreach, KYC, and tax-compliance obligations. IHS Markit offers a comprehensive suite of products in all three of these areas, designed to help firms comply with regulatory obligations.

Counterparty Manager and Outreach360

IHS Markit offers an industry-leading platform enabling financial firms to track required regulatory information for their clients and engage in outreach as necessary. This platform includes the capabilities of Outreach 360, allowing a firm to conduct a unified outreach campaign to contact all of its affected clients. Outreach 360 can be purchased by a client to utilize in-house or as a managed-service offering where IHS Markit personnel will work to conduct in outreach combination with and on behalf of the client. Such outreach will be necessary to inform clients of the upcoming tax reporting rules, as well as activity to retrieve any outstanding information needed to comply with the KYC and tax requirements of the reporting regime.

For firms that offer Stablecoins or expect to offer products that derive their value from another asset, IHS Markit offers a comprehensive managed-service offering that can help firms perform outreach to their clients and receive the required regulatory information to comply with the SEC SBS regulatory regime. In addition to the managed services team, IHS Markit has a partnership with the International Swaps and Derivatives Association (ISDA) on the ISDA Amend platform. ISDA Amend is an industry-leading platform that allows swap dealers, security-based swap dealers, and their counterparties to exchange the required regulatory information required to comply with the CFTC swaps and SEC SBS regulatory regime including specific modules related to the ISDA SBS Protocol and ISDA SBS Top-Up Protocol. Find out more


Having accurate information to identify your customers is of paramount importance and these needs will only be heightened by the requirements of the cryptocurrency reporting regime. The more information a firm possesses on their clients and the accounts to which they are transferring their digital assets, the lower their reporting requirements will be under the regime established in the Infrastructure Investment and Jobs Act.

All Bitcoin transactions can be traced in the permanent ledger of Blockchain. But account ownership and wallet information is not public. With the right tools and analytics, investigators and law-enforcement can analyze cryptocurrency transactions and linkages to IP addresses, cryptocurrency wallets, and integrated-entity data to help find tax evasion, money laundering, and other illegal activity. IHS Markit has extensive tools that can help these larger KYC volumes including dedicated support from our managed-services team. Find out more

IHS Markit Know Your 3rd Party (KY3P) for VASPs & Crypto Brokers

Participants in the cryptomarket and cryptocustody are required to manage the risk of third parties, and with the implementation of the FATF Travel Rule, they must also conduct due diligence on the network of virtual-asset service providers or VASPs. As part of the onboarding process and on an ongoing basis (e.g., annually), participants must conduct compliance due diligence reviews of all VASPs participating in the network. This assessment must validate the adequacy of each VASP's respective BSA/AML and OFAC compliance programs, which would include vendor due diligence, AML requirements, and screening for sanctions and OFAC compliance. In addition, at the point of onboarding and on an ongoing basis, participants must screen for cyberrisk, data privacy, and data security controls. The rules and guidelines are extensive, and we've built the largest financial network in our KY3P and KYC programs to address the requirements of the travel rule for cryptomarket participants including the tracking of SLAs, audit mechanisms, and the ability to ensure complex onsite and remote due diligence is being conducted to meet requirements. Our shared-assessment services make a huge efficiency and cost-reduction impact on the financial services industry, crypto, and corporate customers. KY3P standardizes supplier-risk assessments including those of policies, procedures and document, and supplier interviews, providing measurable observations. KY3P teams execute this service as a shared-data utility model with rich third-party and proprietary datasets to reduce costs. Find out more

IHS Markit Tax Solutions

IHS Markit offers a three-pronged approach to help brokers meet their tax-compliance obligations. This includes industry-leading technology to solicit and maintain tax documentation and produce complete and accurate information reporting that meets the IRS regulatory requirements. The technology is available for use in-house or via our managed-service team. We provide advisory services relating to tax compliance regimes, US tax withholding and information-return reporting, periodic reviews, and compliance health checks. Our key people have over 100 years of combined experience in the field and are also members of the various cryptocurrency working groups with the OECD, IRS, and within the industry.

We use the unique combination of expertise, software, and managed services to offer clients a flexible solution that meets their needs and helps them meet their tax-compliance obligations. We can help identify obligations, assist with rapid onboarding of new account and required re-documentation of existing accounts, document and maintain required information, identify any required withholding and reporting, and streamline the process from beginning to reporting. Because of this integrated and robust solution, we are able to provide everything in a strong control environment at a much lower cost than maintaining the infrastructure and expertise internally. Cryptocurrency cost-basis information can also be captured and maintained as part of the offering, together with existing positions or as a separate standalone process.

Our offerings include, collecting and validating account holder tax forms, ensuring TINs are certified, and assisting with their B-Notice process. We can assist with cost basis calculations for cryptoproducts in addition to traditional securities. We also provide information reporting including Forms 1099-B, 1042-S, and expanded FATCA and CRS reporting as they are introduced. All of the offerings can work together in a strong control environment, allowing for a streamlined and cost-efficient solution, tailored the specific requirements of each client. Find out more

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[1] Please note the ability to recognize taxable losses on digital assets held for less than a month has the potential to be effected by the prohibition on wash sales included in President Biden's Build Back Better Act, which is progressing through the reconciliation process in the US Senate.

[CL1] A sentence on the wash sales provisions of the Build Back Better bill would be appropriate here. If even to direct the reader to the paragraph Bill added.

Posted 20 December 2021 by Adam Goldberg, Regulatory and Compliance SME, Network & Regulatory Solutions, S&P Global Market Intelligence and

William Sheridan, Managing Director, Tax Solutions, S&P Global Market Intelligence and

Yvonne Kunihira-Davidson, Executive Director, Tax Solutions, S&P Global Market Intelligence

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.



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