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

The US Internal Revenue Service and Treasury Department will be able to set tax reporting rules for cryptocurrency transactions starting in 2023, pending final approval of the massive US infrastructure bill.

The provision entitled "Information Reporting for Brokers and Digital Assets" in the Infrastructure Investment and Jobs Act is designed to bolster tax-enforcement efforts and help pay for the estimated $1.2 trillion in 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.

A particularly contentious part of the provision relates to the definition of a "digital-asset broker." The provision states that a digital-asset[1] 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. The bill must still pass the US House of Representatives and be signed by President Joe Biden to become law.

Overview of the proposed cryptocurrency tax rules

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.

The need for increased transparency in the market for digital assets has taken on paramount importance after a wave of cyberattacks on major American companies. Cybercriminals in ransomware attacks typically request payment to release seized data in Bitcoin or another cryptocurrenies. For tax enforcement agencies, financial-intelligence units, and others conducting financial-crime investigations, tracking the movements of cryptocurrency is challenging. Criminals are fully aware that their actions can be traced, so they make efforts to hide them across them across up to thousands of transactions.

Each time a unit of cryptocurrency is traded it creates a taxable event. This occurs whether the cryptocurrency is converted into a 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.

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 a yearly tax form, such as one in the Form 1099 series or another form the IRS may design to meet the new reporting objective. The reporting requirements would be 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."

Compromise to define "brokers" and next steps for the bill

Language in the approved Senate bill has caused considerable concern within the industry related to its potential to capture miners, validators, and software developers within the definition of "broker." There was an intense lobbying effort that resulted in compromise language aimed at clarification. This amendment stated:

"Definition of Broker - Nothing in this section or the amendments made by this section shall be construed to create any inference that a person described in section 6045(e)(1)(D) of the Internal Revenue Code of 1986, as added by this section, includes any person solely engaged in the business of —

(A) validating distributed ledger transactions, without providing other functions or services, or

(B) selling hardware or software for which the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger."

Treasury Secretary Yellen announced her support for the compromise language, aligning with the original intent of the drafters, who never intended to capture software developers, miners, or validators within the reporting rules. There was hope that the amendment would receive a vote and be included in the final bill text prior to passage, but the US Senate was never able to come to an agreement that would allow amendments to the legislation.

The bill must still pass the House and be signed by President Biden. House Speaker Nancy Pelosi (D-CA) has stated that she would not bring the bipartisan measure up for a vote unless the Senate passes a budget reconciliation measure with priorities favored by Democrats that did not make it into its infrastructure bill. In a compromise to win moderate votes needed to proceed with the budget reconciliation process, Speaker Pelosi agreed to schedule a vote on the infrastructure bill by 27 September, 2021.

It remains to be seen whether the House will vote on the Senate bill as it is currently written, sending the legislation to President Biden's desk for signature, or if it will amend the Senate bill before voting on it. If the bill were to be amended prior to passage in the House, it would need to be passed again by the Senate prior to becoming law, buying further time for the budget reconciliation process to move forward. Some advocates of cryptocurrency have specifically urged Speaker Pelosi to adopt this strategy, requesting that the House only amend the cryptocurrency provision prior to the House vote.

The reconciliation bill could include the compromise amendment language. It is also possible that if the compromise language is not included in that budget, it will be included in another must-pass piece of legislation, such as the government-funding measure that must be passed by the end of September.

Even if the compromise language never makes it into law, broad application 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.

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.

Firms will also have to upgrade their KYC 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.

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. And in order to properly report US account holders to the IRS, cryptocurrency exchanges will likely be required to collect certified TINs as part of a Form W-9 remediation. There is also a risk the IRS could expand the information reporting to transfers by non-US clients in the final regulations.

Another aspect that firms must consider is how they interact with Stablecoins and other digital assets that derive value from real-world assets, such as a fiat currencies. Securities and Exchange Commission Chairman Gary Gensler has stated his belief that Stablecoins are Security-Based Swaps (SBS). If that view were to prevail in SEC rulemaking and enforcement, firms offering these assets to customers would be required to comply the with the SEC regulatory regime for SBS, which is scheduled to become effective in November of this year. This will require enhanced client outreach and enhanced onboarding due diligence to ensure firms gather the required regulatory information to trade. It will also require the tax and KYC infrastructure to comply with the reporting regime envisioned by the federal infrastructure bill.

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.

[1] Infrastructure Investment and Jobs Act defines digital assets to mean "any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary."

Posted 16 September 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, Managing Director, EMEA 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.

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