New Cryptocurrency Reporting Requirements – Technology


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Through its recent passage of the Infrastructure Investment and
Jobs Act (the “Act”), Congress resolved an open
question regarding the extent to which cryptocurrency transactions
should be subject to information reporting under Internal Revenue
Code (“Code”) sections 6045 and 6045A. These sections
govern returns of brokers and information with respect to various
transfers, including transfers of covered securities.

Prior to passage of the Act, the U.S Department of the Treasury
(“Treasury”) had been actively considering proposed
rules that would capture cryptocurrency transactions as reportable
broker transactions. This effort is now moot. As discussed in more
detail below, the Act introduced Code section 6045(c)(1)(D), which
creates a new category of broker applicable to digital asset
transfers. Cryptocurrency is a digital asset within the meaning of
the Act. Digital asset brokers will be required to file and furnish
Form 1099-B to report digital asset transfer information beginning
with returns required to be filed after December 31, 2023. We
anticipate the public will have an opportunity to review and
comment on a draft Form 1099-B, which will incorporate this new
requirement to report digital asset transfers.

Who is a digital asset broker? New Code section 6045(c)(1)(D)
provides the following definition: “any person who (for
consideration) is responsible for regularly providing any service
effectuating transfers of digital assets on behalf of another
person.” This language is very broad. And the Act does not
define several key terms, including “regularly
providing,” “service,”
“effectuating,” or “transfers.” Treasury
will likely undertake a regulatory project to provide guidance on
the scope of these terms under its general rule-making authority.
While there are cryptocurrency exchanges through which
cryptocurrency holders trade or transfer their holdings, the
traditional broker or “middleman” role is not present
in cryptocurrency transactions that typically rely upon a
decentralized, distributed ledger to effect and confirm
transactions. Without a clearly identifiable middleman for
cryptocurrency transactions, Congress may have felt compelled to
draft a very broad definition of broker in this context.

What is a digital asset? New Code section 6045(g)(3)(D) does
define that phrase, at least in the context of the additional
information requirements imposed on transactions of covered
securities:

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.

Section 6045(g)(3)(B)(iv) includes digital assets within the
definition of “specified security,” which, in turn,
will be treated as a “covered security” so long as one
of the two acquisition criteria set forth in section
6045(g)(3)(A)(i)–(ii) is satisfied. Thus, the additional
reporting requirements imposed by section 6045(g) can apply to
digital assets. We note that the definition of digital asset
appears within subsection (g)(3), which begins, “For purposes
of this subsection.” Thus, as a technical matter, the
definition of digital asset in subsection (g)(3)(D) applies only to
subsection (g) and not to section 6045 generally. Presumably
Congress intended this definition to apply more broadly (see
section 6045A, as discussed below) and may address this drafting
issue through a technical corrections effort.

The Act also amended Section 6045A to account for other digital
asset transfers. This section imposes an information furnishing
requirement on every “applicable person” that transfers
“to a broker . . . a covered security (as defined in section
6045(g)(3)).” An “applicable person” is defined
as a broker or any other person so designated by Treasury through
regulation. See new Code section 6045A(a)–(b). The Act also
created a new reporting requirement under section 6045A titled
“Return Requirement for Certain Transfers of Digital Assets
Not Otherwise Subject to Reporting.” New Code section
6045A(d) provides:

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 subject to subsection (a).

We anticipate Treasury and the Internal Revenue Service
(“IRS”) will modify Form 1099-B and related
instructions to accommodate this new reporting requirement.

Also, the Act amends Code section 6050I to account for the
receipt of digital assets. This Code section requires persons
receiving in excess of $10,000 in cash in the course of their trade
or business to file a report providing certain information about
the cash receipt. The section previously defined cash to include
foreign currency and monetary instruments designated by Treasury.
In adding section 6050I(d)(3), the Act amends the definition of
cash for purposes of Code section 6050I to include “any
digital asset (as defined in section 6045(g)(3)(D))” (but
note that, pursuant to Notice 2014-21, generally the IRS treats
cryptocurrency as property and not cash or foreign currency). The
change to this Code section is effective for returns required to be
filed after December 31, 2023.

Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.

© Morrison & Foerster LLP. All rights reserved

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