The $1.2 trillion Infrastructure Investment and Jobs Act – also called the Bipartisan Infrastructure Law –garnered attention with its promise to tackle an array of projects, from rebuilding roads and bridges to broadening high-speed internet access.
Provisions in the law that relate to taxing cryptocurrency transactions, however, received less notice. Those measures seek to ensure that taxpayers properly report and pay tax on crypto-related income.
Here’s what you need to know:
1. The law redefines “broker” and views digital assets as “specified securities”
The Infrastructure Act makes two significant changes to Section 6045 of the Internal Revenue Code (IRC). That section requires brokers to report gross proceeds from transactions to the taxpayer and to the IRS. If the item subject to reporting is a “covered security,” the broker must report the customer’s adjusted basis in the security and say whether a gain or loss is long- or short-term. Covered securities are further defined to include “specified securities,” such as stocks, bonds, commodities and other financial instruments.
The Infrastructure Act:
- Includes digital assets in a list of specified securities. The law defines “digital asset” as “any digital representation of value which is recorded on a cryptographically secured distributed ledger” or similar technology. The definition of digital asset is significant as that term is used in a number of other provisions in the Internal Revenue Code.
- The provision covers a broad category of digital assets, including traditional cryptocurrencies like bitcoin as well as non-fungible tokens. The Treasury Secretary has authority to exempt types of transactions.
- 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 “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 information because they provide services in connection with crypto transactions on behalf of users of the software.
2. The law expands reporting requirements to encompass “broker-to-non-broker” transactions
IRC Section 6045A deals with reporting transactions between brokers. It requires every “applicable person” who transfers a covered security (including the “specified securities” discussed above) to a broker to furnish information so the transferee can provide required gain or loss and basis reporting information. The Infrastructure Act expands reporting to cover “broker-to-non-broker” transactions.
3. People receiving more than $10K in digital assets now need to report
IRC Section 6050I requires anyone receiving more than $10,000 in cash in a “trade or business” to report it to the IRS via Form 8300, and to provide a written statement to the payer. It also covers “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. Failure to report cash transactions can trigger steep penalties.
The Infrastructure Act amends the Code so that the reporting requirement also applies to people receiving digital assets.
4. It’s not always easy to identify someone who buys a digital asset
Broadening IRC Section 6050I to apply to people receiving digital assets is consistent with the changes described above to Section 6045: viewing digital assets as a specified security and requiring brokers to report information on certain digital transactions.
On the surface, the law’s reporting requirement would apply to people receiving digital assets for validating transactions or other services relating to crypto transactions.
One of the problems 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. Often times these transactions are entered into on an “open” and “trust-less” basis (meaning that there are no limits as to who can participate in the transaction) making it difficult or impossible to report on who the counterparty is (other than by identifying the blockchain wallet address involved in the transaction).
5. Information-gathering starts Jan. 1, 2023
The changes take effect for returns that must be filed and statements that must be furnished after Dec. 31, 2023. Gathering information for that, though, should start Jan. 1, 2023.