Infrastructure Law Adds Important Crypto Provisions

The Infrastructure Investment and Jobs Act, enacted on November 15, 2021, also known as the Bipartisan Infrastructure Law (the “BIL”), adds many important provisions regarding the development of the United States’ infrastructure network. These provisions are sorely overdue and are welcomed by many.

But lesser attention has been given to several provisions related to the taxation of cryptocurrency transactions. Unlike prior IRS guidance, the provisions all deal with the reporting of crypto transactions. The proper reporting of crypto transactions is important to the U.S. Treasury, as it serves to ensure that taxpayers properly report and pay tax on crypto-related income.

Three crypto-related tax provisions were added to the Internal Revenue Code (the “Code”). While each of the provisions has a delayed effective date, the information gathering required by some of the provisions will take place beginning January 1, 2023, less than 12 months from now.

1. Amendment to Broker Reporting. Code Section 6045 deals with reporting requirements imposed on brokers to the IRS. Brokers are required to report the gross proceeds from transactions in which they are involved to both the taxpayer and the IRS. The reporting is made on Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.” The definition of broker is very broad under Code Section 6045, and includes a dealer, a barter exchange and any person acting as a middleman. If the item subject to reporting is a “covered security,” the broker must report the customer’s adjusted basis in such security and whether any gain or loss with respect to such security is long-term or short-term. Covered securities are further defined to include “specified securities.” These include stocks, bonds, commodities and any financial instruments with respect to which the Secretary of the Treasury determines that adjusted basis reporting is appropriate.

The purpose of reporting under this provision is to allow the IRS to cross-check the information filed by the broker with the information filed by the taxpayer. The failure to report or the failure to provide the statements to the named taxpayer may subject the broker to penalties of up to $3 million a year, or more, if the failure is due to the intentional disregard of filing requirements. Willful failure to file is a misdemeanor.

The BIL makes two significant changes to Code Section 6045. First, the BIL modifies the definition of 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.” The use of the phrase “on behalf another person” is perplexing because the broker already includes a “middleman” concept. On its face, the updated provision would require miners, software developers, transaction validators and node operators to provide the required information as such parties provide services in connection with crypto transactions.

The BIL also amends Code Section 6045 by including “digital assets” in the list of specified securities. Under the BIL, 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.” As enacted, the provision would include a fairly broad category of digital assets, including traditional cryptocurrencies, such as bitcoin, as well as non-fungible tokens. The Secretary of the Treasury has broad authority to exempt types of transactions.

The definition of digital asset is significant as that term is used in a number of other provisions in the Code.

The amendments to this provision have a delayed effective date. The amendments are effective for returns required to be filed, and statements required to be furnished, after December 31, 2023. However, the information gathering will need to commence beginning January 1, 2023.

2. Amendment to Broker-to-Broker Reporting. Code Section 6045, discussed above, deals with broker transactions with customers. Code Section 6045A, in turn, deals with the reporting of transactions between brokers. It is designed to allow the transferee broker to report the information that the originating broker would otherwise be required to report. It requires every applicable person who transfers to a broker a security which is a covered security to furnish information so that the transferee can provide the gain or loss and basis reporting information that is required under Code Section 6045. The BIL includes an amendment to Code Section 6045A providing that returns shall be furnished with respect to any transfer (which is not a part of a sale or exchange executed by such broker) which is a digital asset from an account maintained by such broker to an account not maintained by, or an address not associated with, a person that such broker knows or has reason to know is also a broker. Thus, the provision expands the reporting to “broker-to-non-broker” transactions.

The amendment is effective for returns required to be filed, and statements required to be furnished, after December 31, 2023. But, once again, the information gathering systems must be in place for transactions taking place beginning January 1, 2023.

3. Reporting of Cash Transactions. Code Section 6050I requires any person receiving cash to report the receipt of the cash to the IRS. It applies when a person in the course of a “trade or business” receives cash of $10,000 of more. Cash includes foreign currency. It also includes, “to the extent provided in regulations,” any monetary instrument (whether or not in bearer form) with a face amount of not more than $10,000. The provision would apply, when say, a person goes into a car dealer and buys a car for cash. The person receiving the cash is required to file a Form 8300, Report of Cash Payments Over $10,000 in a Trade or Business, within 15 days of receipt of the cash. The return requires the reporting of the name of the person from whom the cash is received, the taxpayer identification number, the person’s address and occupation. Form 8300 may be filed with the IRS or electronically through FINCEN. The person making the return must also provide a copy of the return to the person whose name is on the return.

The requirement to report cash transactions is buttressed with fairly steep penalties. Penalties apply for the failure to file Form 8300 with the IRS and the failure to provide a copy to the named taxpayer. Failure to comply can result in penalties of up to $3 million a year, or the greater of $25,000 or the amount received if the failure is due to the intentional disregard of filing requirements. Willful failure is a felony.

The BIL amends Code Section 6050I to apply to persons receiving digital assets, cross-referencing the definition contained in Code Section 6045. On its face, this would include digital assets received for validating transactions or other services relating to crypto transactions. One of the problems that this introduces in the world of decentralized finance transactions is the difficulty of identifying the purchaser if the transaction is made through a smart contract rather than from an identifiable person.

Here, again, the amendment is effective for returns required to be filed, and statements required to be furnished, after December 31, 2023.

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Several legislators, including Senator Wyden, Chair of the Finance Committee, have introduced bills seeking to narrow the provisions, most notably the definition of “broker,” but these bills did not gain traction. As matters now stand, the impact of these provisions is uncertain, as much will depend on whether Treasury issues regulations seeking to narrow the scope of the provisions.