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.