Crypto and Digital Asset Reporting in Proposed LegislationBy Julio M. Jimenez | August 5, 2021
In the released draft of the Infrastructure Bipartisan Proposal on Monday, August 2, 2021, a last-minute digital asset tax reporting regime was added.1 This provision in the draft legislation, under Division H – Revenue Provisions, Title VI, Section 80603, may very well change in text over the next week and possibly sustain further changes as the legislation evolves, if it even passes.
From the tax perspective, digital assets really have two dimensions: (1) reporting – meaning who must disclose what to whom, including the IRS, and (2) taxation - when is tax due, by who, how much, what character and what source.
Despite certain fears, however, it appears that the draft legislation proposal only addresses reporting requirements by “broker-dealers” under Internal Revenue Code section 6045. As of now, we are not aware of any other reporting requirements or actual taxation provisions of the treatment of digital assets - that can change any minute. This proposed draft of the legislation is far from finalized. The draft legislation does not address Form 8938 reporting under Internal Revenue Code section 6038D.
As of August 6, the draft clarifies that reporting does not apply to individuals developing blockchain technology and wallets, or those mining or staking, selling hardware or software that an individual may use to control a private key, or developing digital assets or their corresponding protocols for use by other persons if such other persons are not customers; meaning those individuals will not be considered “brokers” for reporting purposes.
Tax Reporting and Digital Assets
Until now, digital assets have enjoyed a certain amount of freedom from reporting. FinCen’s FBAR doesn’t quite nab it2 , the IRS’ FATCA Form 8938 doesn’t make it clear either3 , and since it is not a security, a lot of broker dealers do not need to report it, either because digital asset and cryptocurrency platforms are not dealers, or digital assets are not a covered security, or both. The draft proposal looks to change that, or at least initiate change, by bringing in digital asset dealers as “brokers” for tax reporting purposes, as well as define digital assets as covered securities for reporting by brokers.4
This is easier said than done. Digital assets are unlimitedly divisible and can be held anonymously. Tracking digital wallets, actual lots of digital assets and tranches of cryptocurrency can be extremely difficult and costly, if not impossible. Trading platforms may not be requiring information needed from customers. In addition, traders may not even have access to technical solutions from service providers to harvest the necessary data to comply with the requirements or afford such solutions if they even exist.
The proposal, however, is effective only for “brokers”, not the general taxpayer base, and has an effective date for returns due after December 31, 2023. Practically speaking, that means that 2024 is the first year the regime would be in place. The proposal gives Treasury the authority to make regulatory determinations, and will have time to draft, propose and re-propose regulations that may make the enforcement reasonable. We are far from having anything set yet in stone, and what we end up getting, if anything, may be entirely acceptable.
These ideas are not new though. FinCen has indicated interest in expanding FBAR reporting to include crypto, under Obama there was talk of crypto reporting5 , the IRS went on a fishing expedition a few years ago6 , and Biden certainly has mentioned this idea.7
What does this mean for investors?
Most investors are really interested in complying properly, and if any changes will be retroactive. The proposal would not affect them directly, but it is possible that their trading platforms will disclose some form of information about investors in 2024. Most reporting requirements are currently scant, and we doubt any changes would be retroactive. If investors have any questions on what should be disclosed, they should seek tax advice.
Some investors also wish to know if others will disclose their investments in digital assets. That is hard to accurately answer. In theory, chances are someone in the ownership chain somewhere may have to disclose it, but in practice, this may be impossible to demand or enforce by the IRS. The devil is in the details, as they say. Given the difficulties in reporting digital assets, who knows what this would look like after regulations. It may be more bark than bite from Congress. And just how many people will leave the market if this becomes the case? If this becomes a reality with any teeth, the market numbers will immediately let us know.
What does this mean for traders and brokers?
Some version of reporting requirements may be coming their way. Many traders are fighting against the legislation at this moment. Theoretically, this makes sense from an enforcement perspective, but in practice, we need to see how the details evolve. It may very well be unworkable. The draft brings in digital asset traders and dealers into the section 6045(c) regime, as well as define digital assets as covered securities for Form 1099 reporting with the applicable penalties. But just how to do that, and can it even be done – remains to be seen. We are anticipating that the requirements must in some form be reasonable and enforceable. As of now, it seems undefined.
Taxation of Digital Assets
The current proposal has no provisions on the actual taxation of the digital assets and cryptocurrency. So we expect nothing new from the legislation, although that may change. The current taxation of digital assets is the easier part – the IRS and Treasury have indicated digital assets are personal property, not a currency or a security for taxation purposes, and so you treat it as such. It is equivalent to using an action figure as a medium of exchange at a comic book convention.8 Sales and exchanges, even mere use of digital assets online, are taxable events. There are certain rules the IRS has addressed when certain transactions are taxable and indicating when ordinary vs capital treatment is appropriate, etc. but no real hijinks.9 Many have advocated for currency rule treatments under sections 985-989, others have advocated straight cash treatment, and others have called for the security rules to apply. Crypto is unique as it has dimensions of all three – currency (medium of exchange), a security (due to the manner and modus operandi of the market and valuations), and personal property. In considering comments from those who advocate using those three approaches instead of the current personal property approach, Treasury has indicated, and the IRS promised, new upcoming regulations.10 We expect taxpayer favorable positions in those regulations given our conversations with Treasury, but we do not own a crystal ball. All taxpayers can do now is wait. The new proposed legislation, however, does not address this dimension.
For additional information please contact Julio Jimenez or your Marks Paneth advisor.
 https://www.coindesk.com/bidens-2022-budget-includes-new-crypto-reporting-proposals. See also 117th Congress, Senate, 1st Sess, H.R. 3684, Draft released August 2, 2021.
 FinCEN Notice 2020-2.
 The tax advisory industry is divided on the inclusion of crypto as a reportable asset under section 6038D. Broad vs. narrow interpretations of the regulations thereunder may alter the conclusion. https://thehill.com/policy/finance/557385-irs-chief-agency-needs-more-authority-to-regulate-cryptocurrency
 A brief glimpse of provisions under section 6045 of the proposed draft was shared online. It is understood that section 6038D is also altered to include digital assets on Form 8938.
About Julio M. Jimenez
Julio M. Jimenez, JD, LL.M., is a Principal in the Tax Services Group at Marks Paneth LLP, where he specializes in international tax services for multinational corporations and individuals. Prior to joining the firm, he served in technical leadership roles at two different national public accounting firms, his own international tax advisory practice and the Internal Revenue Service National Office of the Chief Counsel, where he was involved in both IRS examinations and Department of... READ MORE +