New proposed legislation adds information reporting requirements for digital assets

The proposed Infrastructure Investment and Jobs Act would explicitly impose information reporting on cryptocurrency transfers in the same way information reporting is required on transfers of stock or securities. Therefore, both sales price and “basis” – typically original acquisition price – would be reported to the IRS, which would inform the IRS of a taxpayer’s sale of cryptocurrency, and allow the IRS to ascertain gain associated with the sale of a unit of cryptocurrency. These items are already required to be independently reported by a taxpayer on a tax return. Notably, the proposed legislation expressly states that no inference should be taken with respect to whether existing law already requires this type of information reporting. The proposed legislation does not have any clear jurisdictional limitation, however, existing regulations (if they continue to apply) may limit the application to US organized or US controlled entities. Therefore, it is unclear whether there is a basis for the United States to compel non-US brokers to provide this type of information to the IRS.

In order to subject cryptocurrency to the same reporting rules as stock and securities, the proposed legislation expands the definition of “broker” – a term used in existing information reporting laws to identify the person required to undertake reporting – to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” In principle, the amended definition should capture any cryptocurrency exchange and certain entities that otherwise facilitate cryptocurrency sales or transfers. Some in the cryptocurrency industry have expressed concern over the breadth of the amended definition, which does not explicitly exclude miners, software developers, stakers and other individuals who don’t have customers. An amendment has been proposed to eliminate the concern.

Under the proposed legislation, cryptocurrency “brokers” would now be obligated to collect certain information (name, address and US tax identification number) about the owners of cryptocurrency accounts.  They would also be obligated to provide certain information to the IRS regarding a client’s sale of cryptocurrency, including identifying information about the seller and the amount recognized from the sale. The proposed legislation also modifies the so-called “basis reporting” statute to require brokers provide information to the IRS regarding the price at which a particular unit of cryptocurrency was acquired by a client (subject to certain specified adjustments) and to provide this information to other brokers if a client were to transfer his cryptocurrency to another digital wallet or exchange.

This proposed legislation, if enacted into law, would have an effective date of January 1, 2023.