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Tax & Assurance Guidance

New Regulations for Crypto Brokers

Posted on November 16, 2021 by

Jim Biehl

Jim Biehl

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Will the infrastructure bill affect personal tax reporting requirements? It could.

The information reporting provisions included in the infrastructure bill contain language regarding regulations and tax requirements for cryptocurrency brokers, which is causing a stir among investors and crypto advocates.

The bipartisan effort is being justified by some as a means of generating $16.8 billion in new revenue over the next 10 years. Others are concerned that these new rules reflect little more than an attempt to pay for portions of the massive bill, as well as the failure of Congress to demonstrate a greater understanding of how the cryptocurrency market and blockchain technologies actually work.

What are the possible tax implications?

The bill aims to give the Treasury the ability to require 1099 and cost basis reporting to exchange operators, and generally to integrate cryptocurrency activity into the broader view of the IRS. However, this is not a simple flip of a switch. Cost basis reporting as it stands today in the world of crypto is not always readily available because currency bought on one exchange can be moved to a wallet for storage and then to another exchange for sale.

The new bill also attempts to expand suspicious activity reporting requirements involving the exchange of digital assets, and apply previously unenforced wash sale rules to the trade of crypto tokens. The requirement to report cash transactions over $10,000 will now apply to digital assets. These provisions require recipients to verify the sender’s personal information and record their social security number, the nature of the transaction and other information that must be reported to the government within 15 days.  Failure to comply with these requirements is a felony. However, as many have pointed out, it will be very difficult to fulfill these requirements in the digital asset world.

The infrastructure bill also expands the traditional definition of a broker for the purposes of 1099-B reporting to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Without clarification by lawmakers, this could include anyone involved in the cryptocurrency industry, many of whom would have no reasonable means of complying with the reporting requirements simply due to the technology and digital asset exchanges.

Cryptocurrency miners and validators, for example, both engage in regular digital asset “transactions” that don’t generate any data on the identities of participants. Therefore, there is simply no data to report. Without any guidance from lawmakers, it would be difficult for the cryptocurrency industry to begin collecting tax information on all customers and in relation to all transactions.

Since blockchain technology is not well understood by regulators, rushing these provisions into the bill introduces even more confusion into an area that desperately needs transparency and clarification.

When to expect the changes

On Monday, November 15, President Biden signed the bill that will now subject cryptocurrency transactions to the new reporting rules for returns required to be filed after December 31, 2023. The cryptocurrency environment is evolving all the time, and congress will need to seek the advice of digital asset experts to keep pace, as well as to address the more immediate need to provide and enforce amendments to the active infrastructure bill.

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If you have questions about the new legislation surrounding cryptocurrency, please contact us today.

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Jim Biehl

Shareholder, Manufacturing & Distribution

Leading the firm’s manufacturing & distribution group, Jim has built a reputation for providing strategic tax, accounting and operational support to owners.

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