Close up of one dollar bill and blockchain code. Cryptocurrency, digital money concept.
getty
The Senate’s infrastructure draft is available and, as expected, contains tax information on cryptocurrencies. What does this mean for the digital currency industry? And why did Congress suddenly decide to require this information reporting?
First, let’s answer the second question: $ 28 billion. That is the estimate of how much the proposed reporting requirements could increase, and Congress is obviously running off that estimate. But there are even more optimistic estimates, like that of the National Taxpayers Union Foundation, which extrapolated from previous data to estimate that there is roughly $ 50 billion in unpaid taxes on cryptocurrency profits.
This fairly high sales estimate is worth noting for those concerned that the proposed intelligence coverage is intended to close or dramatically cut down the cryptocurrency industry in the United States. If Congress really intended it, the sales estimate should be well below nearly $ 30 billion.
The perception of the “suddenness” of the proposal in the Infrastructure Act is incorrect. Congress hasn’t spent much time thinking about what information reporting should be required for cryptocurrencies, but the IRS set guidelines under Section 6045 in its 2019 priority guidance plan, which identifies who qualifies as a broker and tells them what they have to report.
When it comes to the issue of tax information, at least in recent years it has been less about “whether” but more about “when”.
What do the proposed rules mean for the cryptocurrency industry? The general rules for information reporting require brokers to submit information reports to the IRS and clients.
In an earlier discussion draft of the Infrastructure Act, it was proposed to amend Section 6045 (c) (1) to add the definition of broker to anyone who, for a fee, “is responsible for any service and regularly provides a service that effects the transfer of digital assets “. There was an uproar over this version of the definition as miners and decentralized exchanges would likely have fallen under it but lack the information they need to comply with reporting requirements, which resulted in changes over the weekend of July 31st.
The bill, which was published on August 1st, is based on the definition as “any person responsible (for a fee) for the regular provision of services that effect transfers of digital assets on behalf of another person”. The definition in § 6045 already includes everyone who regularly acts as an agent in property matters.
Digital currency is owned, not currency, for tax purposes based on the 2014-21, 2014-16 IRB 938 Notice. The change in section 6045 (c) (1) would mean that many more 1099-B Forms would be issued to owners of digital currency. The proposed bill also adds failure to submit required information refunds to the list of returns subject to Section 6724 sanctions.
The draft infrastructure bill also proposes defining the term “digital asset” as “any digital representation of value recorded in a cryptographically secured distributed ledger or similar technology”. The finance minister can determine what else belongs to “similar technology”.
LONDON, ENGLAND – JUNE 05: US Treasury Secretary Janet Yellen speaks during a press conference … [+]
Getty Images
According to the proposal, brokers are required to include the client’s adjusted base in the asset in information reports and indicate whether any gain or loss on the asset is long-term or short-term.
Section 6045A, which covers the information required to transfer covered securities to brokers, would include a new subsection (d) stating that brokers who transfer a digital asset from an account held by the broker to an account not dated by the Broker is managed, or an address that is not connected to a person who the broker knows or needs to know that it is also a broker, must submit a declaration of information for this calendar year.
In addition to the new reporting requirement, Section 6050I (d) would be amended to treat digital assets as cash. That would require anyone involved in a trade or business who receives more than $ 10,000 in digital assets in the course of the trade or business in one or more related transactions to complete the 8300 Cash Payments Report for $ 10,000 that in a shop or business. “
The changes would apply to statements and statements that must be filed after December 31, 2023. This gives the IRS and Treasury some leeway to develop regulations and other guidance that might provide some relief, or at least more security, to taxpayers and reportable individuals.
Note that legal language is not the end of the story for reporting requirements. While it’s an important step, Congress doesn’t prepare the forms taxpayers are required to submit, or usually issue a lot of clarifications after the law is passed, other than technical fixes.
Once the law goes into effect, the ball will be with the IRS in terms of congressional interpretation and enforcement of that intent through procedural mechanisms such as Form 1099-B.
One of the ongoing concerns is whether the bill could potentially postpone the tax treatment of cryptocurrencies by calling cryptocurrencies as cash and securities for the purposes of these proposed information reporting requirements. The 2014-21 Notice treats virtual currencies as property for federal tax purposes, and the IRS has built all of its previous guidance on that understanding.
In addition, the bill contains a design rule that states that no conclusions can be drawn from it as to whether a digital asset is owned, which is a specific security, or whether a person is a broker under Section 6045, but this rule only applies to the time prior to the effective date of the changes.
At least for the time being, a fundamental overhaul of the tax treatment of cryptocurrencies beyond the addition of information reports does not seem intended and unlikely in the foreseeable future.