Big Changes for the Crypto World Part 1: How the Infrastructure Investment and Jobs Act will Impact Cryptocurrency
November 16, 2021
At a glance
- The main takeaway: The Infrastructure Investment Jobs Act was passed by Congress on November 5, 2021 and was signed by President Biden on November 15, 2021. The bill has some provisions which have the crypto world buzzing.
- Impact on you and your business: Those who deal in cryptocurrency will be required to report many digital asset transactions to the IRS and/or FinCEN starting in 2024.
- Next steps: Work with Aprio’s experts who are well-versed in the accounting requirements of the technology and blockchain space to start preparing for these changes now.
The full story:
What does cryptocurrency have to do with infrastructure? Not much, other than the fact that it plays a role in how Congress intends to pay for the infrastructure bill.
There are two primary reporting requirements which concern the crypto industry: IRS Forms 1099-B and 8300.
IRS Form 1099-B:
Decades ago, when people sold shares of stock at brokerage houses, reporting stock sales to the IRS was not a requirement. When the IRS first implemented 1099 reporting for people who sold stock of public companies, they were only required to report sales proceeds, however, there was no requirement to report cost basis. Taxpayers had to track, and report cost basis on their own.
Eventually, the IRS required brokers to report cost basis. Even today, if you sell an asset on one platform that you purchased on another platform, the brokerage house at which you sold the asset does not have to report cost basis.
The infrastructure bill includes requirements for reporting digital asset transactions beginning in 2024. While that date seems far off into the future, in the crypto world, it might as well be tomorrow.
There are several vast considerations that every player within the crypto world should be aware of, especially since the language in the bill addresses the already-complex crypto world in a very simplistic way.
Here is a preliminary overview of the key areas crypto players should consider.
Who is a broker?
One of the major changes proposed in the bill is the definition of a broker. The bill redefines a broker to include “… any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
To properly understand this new definition, we should consider how the IRS defines a “person.” According to the IRS’s regulations, a person “… includes any governmental unit and any agency or instrumentality thereof.” This raises a few key questions:
- How would the crypto world define “agency” or “instrumentality”?
- Would the IRS consider the bitcoin blockchain or a decentralized autonomous organization (DAO) as an instrumentality? If so, why and how?
- In the IRS’s eyes, what activities or functions would constitute providing services effectuating transfers of another person’s digital assets?
- What does ‘for consideration’ really mean in the crypto world. What happens if the “consideration” referenced in the definition is a fraction of a penny? Would there be any de minimis exception regarding the size of the consideration? The crypto industry is hopeful.
The key players transacting on-chain, and the types of activities they’re conducting, may include validators, airdrop and reward tokens, processing companies, B-ATMs, de-fi protocols, exchanges and many others. In fact, the list may be as long as the blockchain itself.
What about people and companies who mine digital assets or stake their own digital assets? Where and how will accounting and/or reporting obligations be determined?
Some of the bill’s earlier proposed amendments included exempting “validators” of transactions on the blockchain who do effectuate transfers and, in some cases, earn slivers of fees. But none of the amendments were accepted prior to the vote.
Reporting to the IRS
The real reason why Congress included this change to who qualifies as a broker is not about the definition itself; it is because brokers have IRS reporting responsibilities.
Once the IRS determines that you or your company is considered a broker under this definition, you will have massive reporting requirements, just like brokers of securities.
Aside from the language pertaining to brokers, the bill goes on to define “digital assets” as follows:
“Except as otherwise provided by the Secretary, the term ‘digital asset’ means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.’’ [The term ‘secretary’ essentially refers to the IRS]
In addition to reporting sales transactions, the bill includes a specific requirement to report transfers, which it describes as:
“CERTAIN TRANSFERS OF DIGITAL ASSETS NOT OTHERWISE SUBJECT TO REPORTING
Any broker, with respect to any transfer (which is not part of a sale or exchange executed by such broker) during a calendar year of a covered security which is a digital asset 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, shall make a return for such calendar year, in such form as determined by the Secretary, showing the information otherwise required to be furnished with respect to transfers.”
Clearly, we will see in many cases transactions being reported multiple times. Keeping up with your basis, transfers and uses of your digital assets will become more critical. Activities will be reported to the IRS that will for sure conflict with positions investors take and without having more detailed records of your transactions, you may not be in a good position to dispute the amounts in a 1099 filed with the IRS.
IRS Form 8300:
Decades ago, the Department of Treasury released IRS Form 8300 requiring reports when Cash Payments over $10,000 were received in a trade or business. This form was last modified in August 2014, and we are expecting significant revisions to provide for the new reporting requirements of digital asset transactions.
Thus, as part of the Infrastructure Act, IRS Code Section 6050I(d) is being modified to include any digital asset. The IRS has defined digital assets in this Act by adding IRS Code Section 6040(g)(3)(D). This new code section defines ‘digital asset’ 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 (IRS).”
Many questions will need to be addressed by the IRS including but not limited to:
- What transactions might be considered as part of or not part of a trade or business;
- Will this form be changed to provide reporting for other trade or business transactions;
- If the IRS will address the value of assets with no stated market value;
- The IRS does not discuss thinly traded assets as having a value less than what might be reflected on one or many platforms;
- With a 15-day filing requirement, the prospect of developing valuation metrics outside of a platform may become very time-sensitive;
- Will the IRS include in its’ definition of digital assets, those not yet on a blockchain and underdevelopment; and
- How or will recipients report the receipt of digital assets from non-entities such as Decentralized Autonomous Organizations (DAO’s)?
IRS Form 8300 reports are required to be filed within 15 days of the receipt of the asset(s) and filed electronically thru FinCEN’s Bank Secrecy Act (BSA) Electronic filing Systems.
Current penalties for not filing Form 8300 are:
- A minimum penalty of $25,000 may be imposed if the failure to file is due to an intentional or willful disregard of the reporting requirements.
- These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.
We will be looking out to see how the IRS/FinCEN may modify these penalties. Either way, they are a huge deterrent.
While the bill indicates that the effective date is for forms due after December 31, 2023, that would suggest this will not take effect until January 1, 2024, and that the first forms are expected to be filed by January 15, 2024, which will be here very soon.
The bottom line
Brokers in the crypto world, as defined by the IRS, of all sizes will have to file IRS Form 1099-B and report sales proceeds for digital transactions, cost basis and transfers from one account to another beginning with the 2023 tax year, whose filings will be due in 2024. The current title of this form is Proceeds from Broker and Barter Transaction will likely be renamed: Proceeds to Broker, Barter and Digital Asset Transactions.
Some companies already have spent millions building reporting platforms to help them meet these requirements, but others are far behind and need to start the preparation process now. Many compliant taxpayers would love for the crypto world to make their lives easier and to provide them with accurate 1099’s with sales proceeds and cost basis. Of course, there are many non-compliant taxpayers who are not looking forward to these 1099-B’s being filed.
We expect the reporting to be full of errors and will result in many recipients and issuers at odds, and the IRS will be sending out a lot of letters assessing tax. The IRS relies 100 percent on 1099’s as submitted. A taxpayer will be assessed tax due until they can prove otherwise.
In many cases, multiple 1099-B’s will result in over-reporting of transactions and we can’t wait for the IRS to publish guidelines. These crypto-related provisions have been in the works for years, and we do expect the lobbyists to continue to ask for exceptions as to the filing requirements.
Big questions will be if the IRS attempts to enforce filing requirements on DAO’s. Could the IRS enforce any of these rules on a DAO? Perhaps only if they can prove that a specific DAO is a Partnership for US income tax purposes.
Once the bill does become law, the IRS will work towards providing guidance to report the sales and movement of digital assets. It only took the IRS four years to share their guidance on the Bitcoin Fork, which happened in 2017. So, let’s hope the IRS rapidly shares guidance on this reporting change, which will need to start in 2024 for transactions in 2023. Your systems need to be implemented during 2022 to be in place by January 1, 2023.
Aprio’s Blockchain Tax/KYC/AML/BSA Practice can guide you in implementing the proper policies to enable your systems to comply with these filing requirements. We have clients who have already implemented procedures to file IRS Form 8300, and we can guide you along the way.
Schedule a free consultation with us today and get started!
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.