Key Points

• The Infrastructure Investment and Jobs Act (H.R. 3684) passed the Senate with a broad definition of "broker" to target cryptocurrency information reporting to the IRS.
• Absent amendment, the bill imposes obligations similar to IRS Form 1099-B on various technology providers in the crypto industry, even if they do not broker digital asset transactions and lack the necessary information to comply.

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On August 10, 2021, the Senate voted 69 to 30 to pass the Infrastructure Investment and Jobs Act. To help fund the spending package, Section 80603 of the bill introduces heightened tax reporting requirements on cryptocurrency and other digital asset transactions. Despite widespread industry outcry, the controversial provision advances to the House of Representatives with its expansive definition of "broker" intact. Opponents argue that the bill's sweeping language could amount to a ban on crypto mining in the United States and drive critical technology development overseas.

Back to Basis

Under Notice 2014-21, the IRS currently classifies cryptocurrency as property for tax purposes. Upon a realization event, any related capital gains and losses are subject to income tax and reporting requirements. However, crypto exchanges have not consistently issued the IRS or taxpayers sufficient information on a cost basis, as needed to complete Form 8949 and Schedule D for these asset sales. Instead, cryptocurrency investors and traders bear the responsibility for cost basis tracking on their own transactions to file taxes. Basis discrepancies between third-party reporting forms and tax returns have also triggered erroneous IRS notices on crypto sales in recent years.

In drafting the bill's reporting provision, lawmakers intended to cover crypto exchange platforms under a standardized Form 1099 regime with corresponding penalties—like traditional stock brokerages. These platforms would be required to report the adjusted basis and character of gain or loss on a user's sale of digital assets, including cryptocurrencies such as Bitcoin, Ethereum, or XRP. In itself, the incorporation of cost basis functionality would present a significant challenge to exchange systems. Yet, the vague language extends these reporting requirements far beyond centralized cryptocurrency exchanges.

"Brokers" of "Digital Assets"

Internal Revenue Code Section 6045 generally imposes information reporting requirements on those "doing business as a broker" with respect to sales on behalf of customers. The infrastructure bill amends these rules to include in the definition of broker “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” For this purpose, a "digital asset" means “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology."' The Secretary of the Treasury is authorized to determine what else constitutes “similar technology.”

Based on bill's imprecise wording, various noncustodial blockchain technology providers may represent "brokers" subject to reporting obligations. For example:

• Proof of Stake Validators and Proof of Work Miners – Any party engaged in mining or staking activities could be considered "effectuating transfers of digital assets" by acting as an intermediary for cryptocurrency transactions on a network, broadly conceived.
• Blockchain Node Operators or Delegates – Running network software to secure the blockchain and broadcast transactions effectively serves a facilitative role in digital asset transfers.
• Software Developers – Merely building platforms designed for swapping or earning tokens (or making available open-source code for others to do so) may create an unforeseen risk for broker and exchange reporting.
• Crypto Wallet Suppliers – While more remote, even selling hardware or software storage for private keys providing cryptocurrency access could be deemed as performing as a "broker" to digital assets.

In each of these cases, information reporting compliance does not appear feasible. These providers generally lack any access to the personal and financial data necessary to furnish a 1099 with respect to transactions. For example (and by design), a validator on the blockchain does not know the identities of the parties involved in the transaction.

While competing amendments sought to address these issues, the original text survived the Senate without any exemption or clarification. The debate is expected to continue when the House reconvenes in September. It remains to be seen how the definitions of "broker" and "digital assets" will evolve and whether third-party cost basis reporting becomes the law for cryptocurrency.

Please contact us with any questions on current tax guidance on cryptocurrency.