The bipartisan infrastructure bill includes requirements for brokers to report their customers’ cryptocurrency gains to the Internal Revenue Service, but exactly what constitutes a broker is stirring controversy.
As one of the ways to help pay for an estimated $28 billion of the $1.2 trillion in infrastructure spending, congressional negotiators included a provision requiring information reporting on the names, addresses and gross proceeds of cryptocurrency transactions by brokers. The crypto industry tried to lobby Congress to narrow the provision so it wouldn’t also apply to technology companies involved in the crypto industry, as well as cryptocurrency “miners” who use their computer power to solve complex mathematical problems to process the currency, but they were unable to win changes in the version of the bill passed last month by the Senate (
The House is not expected to vote on the legislation until later this month, but at this point the language seems to be finalized. If the infrastructure bill ultimately passes, which is uncertain since it is tied to the larger $3.5 trillion spending and budget package from the Biden administration that Republicans uniformly oppose, the crypto industry is expected to lobby the Treasury Department to narrow the definition of “broker” in the tax regulations that would ultimately need to be written.
“The IRS has been pounding the table to Congress that there has been a severe deficiency in tax compliance when it comes to crypto exchanges, and the reason being that there’s no current statutory requirement for crypto exchanges and other income-generating platforms to issue year-end reports of taxable gains to both the investor and the IRS, similar to existing brokerages for equity trades,” said Tom Cardinale, a partner in EisnerAmper's corporate tax group for blockchain and cryptocurrency services. “This lack of reporting leaves a tendency for crypto investors to think they don’t have to report the gains if the IRS does not know about them. The infrastructure bill, which is still in process, is looking to correct this by modifying the term ‘broker’ to include certain crypto-facilitating companies and exchanges.”
The IRS has long sought such information, filing so-called John Doe summonses against cryptocurrency exchanges in an effort to uncover tax evasion by their customers. By requiring companies to provide the information on a regular basis to the IRS, the agency wouldn’t need to go through the courts to compel companies to produce it.
“In the meantime, while Congress is fighting over the language of that bill, the IRS has been carrying out their own objectives, going after exchanges through court rulings, trying to get information, starting with Coinbase a few years ago and now they’ve recently gone after Kraken and Poloniex,” said Cardinale. “They’ve been getting names, trades and activity of investors on those platforms. But it would be a lot easier if crypto exchanges were just given the same reporting obligations as regular investment brokerages, that is, at year end, to report a detailed 1099-B equivalent to investors that shows all of the gains and losses, which the IRS gets a copy of, and that has always born more compliance by investors in any capacity. But, right now in the crypto community, there currently is no statutory requirement.”
There is little chance of the language changing when the House takes up the bill because of the tenuous bipartisan deal that negotiators struck in the Senate. “The infrastructure bill was amended in the Senate with a bipartisan majority,” said Rochelle Hodes, a principal in the Washington National Tax Office at Crowe LLP. “It didn’t go through the special rules of reconciliation where the Democrats could enact a bill alone with only 50 votes. The coalition of all the parties agreed, and it’s a very delicate balance. There were amendments offered in the Senate to the cryptocurrency provision to narrow the definition of a crypto broker at the end of the day, in the most general terms, to exclude miners and software providers. Those amendments did not get passed. Now it’s over in the House and the budget resolution has language saying that this bill will be brought to the floor for a vote in the House on September 27. There’s an opportunity for folks to try to get changes to this bill in the House, but the thing is if the bill is changed, it has to go back to the Senate, and will there still be 60 votes there to do another vote? The Democratic leadership in the House has to consider how they’ll handle this. I think changes to the infrastructure bill in the House would be an uphill battle because of the fact that there’s already agreement. The Senate has already enacted it, and that would be a challenge.”
Some observers speculate that legislative changes could be attached to a must-pass year-end bill, but Hodes is uncertain about the likelihood of that actually happening. One of the sticking points is that the cryptocurrency provisions are supposed to raise money to help pay for the infrastructure bill, but narrowing the definition of a broker too much would mean less tax revenue to use as an offset for the infrastructure expenses.
“There was maybe a $5 billion difference between the original language and the tightened language,” said Hodes. “Treasury was also concerned that the tightened language would create an opportunity for some folks who are intended to be included to bypass reporting obligations, so there was definite concern from Treasury there.”
“There were a couple of amendments that got proposed on the Senate side, and they were not included in the final bill that was sent over to the House,” said Debbie Pflieger, an EY Financial Services Office partner in the business tax advisory practice and leader on tax information reporting and withholding. “I expect that the industry is going to continue to lobby, although the Treasury did drop an alert saying, ‘Industry, don’t panic. We understand that if we define the term ‘broker’ too broadly in the ultimate guidance, you won’t have valuable information to provide to the IRS.’ I think that whether Congress manages to narrow the language, or whether it’s left to Treasury, at the end of the day whatever rules we need to actually implement will be reasonable for the industry while still getting the IRS and Treasury the information they need, which right now they just don’t have.”
The Treasury may issue a further statement to provide more comfort to cryptocurrency miners and software vendors that they weren’t intended to be captured under the broker definition (
“That would perhaps reduce some of the urgency to try to get a change in the House and it would make one less group trying to change the infrastructure bill in the House,” said Hodes.
The action on the infrastructure bill in the House is still uncertain. The tax-writing House Ways and Means Committee has been focusing this week on marking up the tax provisions of the Build Back Better Act combining the infrastructure and spending bills.
“The taxation of cryptocurrency would not change if the Infrastructure Investment and Jobs Act gets approved by the House,” said Edward Kim, tax director in the private client group at Anchin. “The relevant section of the Act relates to a new tax information reporting requirement for brokers within the cryptocurrency industry. This industry is currently not subject to the same reporting requirement as a typical financial broker. This new Act would require cryptocurrency brokers to provide similar 1099 tax reporting forms to their customers. However, the Act defines ‘brokers’ very broadly as ‘any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.’ This could cause unexpected reporting requirements for persons who are software developers and/or cryptocurrency miners as they would not have customers in the normal sense of business.”
Treasury guidance
The Treasury guidance will be key to the practical impact of the legislation. “I think that while it would be great to get a narrower definition in the actual technical language in the bill, lobbying Treasury and getting input into the guidance that gets issued is probably going to be more effective because it’s as not as rushed a process, and it’s going to be Treasury’s responsibility to really understand what it is they are requiring certain parties to do,” said Pflieger.
Lobbyists from industry groups such as the Blockchain Association and the Association for Digital Asset Markets managed to call more attention to their industry in Washington, however. “This is no different than any other industry,” said Hodes. “They’re just new. People didn’t expect them to marshal an effective lobbying campaign. They got two amendments put forward. Those amendments didn’t ultimately get passed, but they really raised their profile and the profile of the issue. We have yet to see what it will look like in the House. This is a ‘stay tuned’ kind of moment. But this is no different than any of the other industries that are being affected by potential revenue raisers in both the reconciliation bill and the infrastructure bill.”
Even without the legislation, the Treasury and the IRS have the ability to regulate cryptocurrency, but the bill provides them with more justification. “I expect some form of these reporting rules will get passed, and if by chance the infrastructure bill doesn't pass, it will show up someplace else,” said Denise Hintzke, Deloitte’s Global Information Reporting practice leader. “It’s just inevitable that it’s going to happen. The IRS has said that the regulations requiring the reporting of cryptocurrency have already technically been drafted. They’re waiting on the legislation right now, but they could potentially release regulations even in the absence of it. Say if the worst case happened and this didn’t pass, there would still be a good chance that we would see regulations around cryptocurrency, and there would just be amendments to the current 6045 broker-reporting regulations that would expand that definition to include virtual assets. There are many people who think that could have been done without any legislation. The legislation just gives it more support under the regulations themselves.”
The IRS and the Treasury already have some support in the existing regulations for Section 6045 of the Tax Code.
“When you look at those 6045 regulations today, there are things that the IRS could do,” said Hintzke. “They could add this as virtual currency as a reportable asset. Already the definition of commodity says that it includes anything that trades on the futures exchange, and of course certain currencies trade on the futures exchange. So there are ways that they could already pull it in. I think the legislation just helps to underpin it a little bit better. There is a very broad definition.”
The broad definition of a crypto broker may help give the Treasury and the IRS a way to stay current in the industry. “This is in some ways necessary because this is an area that is moving quickly,” said Hintzke. “Deloitte has been dabbling in the crypto space for close to 10 years, and to me it seems like almost on a weekly basis somebody is coming up with some new products, new coins, new tokens, new concepts around it. If you don’t have something that is broad enough, you find yourself constantly going back to the drawing board. I think ultimately what will happen is if the infrastructure bill passes, it will have this broad definition in there, and then it will be in the regulations where they will scale back and pinpoint a little bit more specifically what does get pulled into the definition of ‘broker’ and the who, what, where and when of reporting, because what the regulations and the legislation provides us is the what.”
The definition may be too broad for some taxpayers, however. “If they retain the language that they’re currently using in the bill, I think that people are concerned that it’s too broad,” said Jonathan Sambur, a tax partner at the law firm Eversheds Sutherland. “What they seem to be doing is future-proofing the statute and then essentially delegating to Treasury the authority to include or exclude different parties based on what they’re doing.”
Information reporting help
The information reporting requirement could be helpful to some taxpayers and tax preparers by providing the needed documentation for reporting on crypto transactions to the IRS, but it could bring problems too.
“Information reporting is a double-edged sword,” said Hodes. “Information reporting tells the payee, the recipient of the payment, here’s what you got, and sometimes it’s not particularly accurate. Here it would be broker reporting, which is more like gross proceeds reporting, but there is a provision in the bill to provide basis information. All of that information is helpful as the taxpayer tries to comply with their own tax obligations, but on the other hand the information is now with the IRS so they’re going to expect to see on your return in the appropriate spot that you are including the information that was on the information return and that your tax liability as computed reflects what you got on that information return, and the IRS will do matching eventually. We’ve all seen matching is a great tool for the IRS because it allows with very little human intervention automated notices to go out to people saying ‘Hey, you owe us more money.’ It also allows the IRS in a lot of cases to just make changes to the return based on math error without having to go through deficiency procedures, but we’ve also seen, particularly with the pandemic since the spring of 2020, all of the worst aspects of automation and collection have occurred. Taxpayers are receiving their communications from the IRS later. They’re not able to work as efficiently with their tax advisors to try to figure out how to respond. They’re responding to the IRS on paper, and that mail is very slow to go through IRS processes. We’re talking months. The international penalty abatement group has told my folks who call that there is a 12-month backlog.”
Information reporting could have other complications as well when it comes to cryptocurrency. “Brokers are supposed to report to the extent that you’ve got a specified security, and presumably these digital assets become specified securities to the extent they know that basis,” said Pflieger. “Today if I call my broker and I buy stock and I then sell it and buy it from that same broker six months from now, the 1099-B that I get from the broker is going to report the amount of shares that I sold, but also how much I paid for those shares, my basis. One of the challenges brokers are concerned about, and especially the exchanges, is that because of the way that digital assets can be transferred, that they’re not going to have that basis information. Part of what’s in this bill would say, gee, if I bought Bitcoin from an exchange, somebody knows how much I paid for it. It’s easy for me to transfer it via my wallet out of that exchange and maybe to another broker, but the original exchange has no idea of where it lands.”
Information reporting will need to be able to distinguish between a sale or a transfer of cryptocurrency from one exchange to another. “It will be up to the IRS to actually get that information and be able to match it to my tax return either now if I do sell it, or otherwise at some future date when I sell it or otherwise transfer it, which is why Form 8300 reporting is so important,” said Pflieger. “If I use Bitcoin that I acquired two years ago and I had a gain on it, but I then use it to buy a car, certainly the car dealer isn’t going to report a sale of that Bitcoin because I didn’t sell it to them. I used it in a transaction with them, but the Form 8300 reporting would capture that.”
The information could prove helpful to accountants as well as their clients. “It’s not too much different than the information reporting rules we have today in all different types of spaces,” said Hintzke. “Study after study has shown that compliance increases substantially when you have third-party reporting. There has been a lot of noise from investors, the same way that there was before the cost basis days for regular securities, where investors were saying, ‘It’s very difficult for us to comply with the rules. It’s hard for us to track this. We don’t necessarily know what our tax basis is, etc.’ So this information will be helpful. If you were to go online, you’ll see lots of comments from accountants saying this information would be very helpful. If it could be provided to them, it would make tax compliance much easier. At the end of the day it will make life easier for investors.”
However, those who don’t report the transactions on their tax returns could find themselves facing legal complications. “Just like any other taxpayer that is subject to information reporting with respect to their income, obviously the government is going to use the information to verify and validate the information that the taxpayer puts on their own returns,” said Sambur. “It should in theory increase transparency and reduce the potential mismatch between what the taxpayer puts on their return and what actually occurred.”
Congress could well come back and offer further clarity in future legislation that could help both taxpayers and tax professionals. “There is a bill in Congress sitting on the shelf, but hopefully it gets taken up soon, called the Virtual Currency Tax Fairness Act, and it has a very forgiving exemption, a de minimis exemption, for people that are using Bitcoin to make small purchases or even using it for services, to make it exempt from gain reporting,” said Cardinale. “I believe the language of the bill currently has a $200 gain per transaction. That’s a pretty forgiving number if that were to go through. I would think that would be $25 or $50. The fact that the opening language is $200 is pretty forgiving, and it could allow some tax planning opportunities to allow people to slowly liquidate their Bitcoin through everyday purchases and services without having to report any gain. That sounds like a pretty lucrative offer.”
Accountants and tax professionals should stay involved in the crypto rules of the infrastructure bill if the legislation ultimately gets passed in Congress. “The industry does have an opportunity and should be fully engaged to advocate for how the rules, if they are enacted, would best work,” said Hodes. “They should start engaging the government now at the administrative level at Treasury and IRS to communicate what’s possible, how the industry works, so that if this stuff does get enacted, their concerns will be considered as part of the process. Of course, there’s public notice and comment when regulations come out and that’s another opportunity. There’s a very long road ahead if this does get enacted, but there are lots of opportunities for the industry to be involved in how the details of those rules come out.”
