Regulatory and Industry News Alerts from Armanino

Infrastructure Bill Could Add Heavy Crypto Reporting Requirements for Digital Asset Ecosystem

by Nick Gibbons
August 24, 2021

On August 10, the U.S. Senate passed its version of an infrastructure bill which contains specified rules for taxpayers in the digital assets industry. These include:

  • Broker reporting requirements under IRC Section 6045 (informational returns about customers).
  • Reporting requirements for any transfer of a digital asset that is not part of a sale (or exchange) from an account maintained by the broker to an account maintained by a non-broker. This would target transfers of digital assets from an exchange account (hot wallet) to a cold wallet, which is not regulated by an exchange.
  • Reporting requirements for any person who operates a trade or business that receives payment in digital assets in connection with such trade or business valued at more than $10K at the time of the transaction.

The bill’s language defines “digital assets” as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” The bill requires taxpayers within the digital asset ecosystem be treated as “brokers” for purposes of the reporting requirements.

For crypto exchange platform companies (such as Coinbase), the reporting requirements were expected and already occurring in some cases. The problem is that other companies within the digital asset ecosystem (companies in the business of mining, staking or selling related equipment and software) could also be required to follow the reporting rules because the bill’s definition of “broker” is “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets on behalf of another person.”

In many cases, requesting the customer information required to meet the IRS reporting requirements for companies in the digital asset industry that are not exchanges would be incredibly burdensome and potentially an existential problem for these companies.

The bill now goes to the U.S. House of Representatives, where it is hoped that the miners, stakers and companies selling related equipment and software will be excluded from the definition of “broker,” thus not requiring these taxpayers to comply with the new reporting requirements.

If passed as is, the bill would be effective for federal tax returns that are required to be filed after December 31, 2023. Therefore, information would need to be collected for all transactions occurring during calendar year 2023, because such transactions would be reported at the start of 2024.

For questions or to learn more about tax compliance for digital assets, contact our experts.

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