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Broker Reporting Rules for Digital Assets Enacted as Part of Infrastructure Investment and Jobs Act
Practical Law Legal Update w-033-3693 (Approx. 3 pages)
Broker Reporting Rules for Digital Assets Enacted as Part of Infrastructure Investment and Jobs Act
by Practical Law Corporate & Securities
| Published on 16 Nov 2021 • USA (National/Federal) |
On November 15, 2021, President Biden signed into law the $1.2 trillion Infrastructure Investment and Jobs Act of 2021, which provides substantial funding for US infrastructure. The Act also includes several tax provisions, including rules expanding broker information reporting rules to cover digital assets.
The Infrastructure Investment and Jobs Act of 2021 (the Act), signed into law by President Biden on November 15, 2021, contains relatively few tax provisions. However, one notable tax provision in the Act is an expansion of the definition of "broker" under information reporting rules to include "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person" (IRC Section 6045(c)(1)(D)).
Under the rules of IRC Section 6045, brokers are required to file information returns (on IRS Form 1099-B) showing the names and addresses of their customers and the gross proceeds of transactions effected through the broker and to furnish their customers with information statements. If the transaction involves a "specified security" of a customer acquired through the broker account, the broker must also report:
- The customer's adjusted tax basis in the security.
- Whether any gain or loss from a transaction in the security is long-term or short-term.
The Act expands the definition of specified security to include digital assets acquired on or after January 1, 2023, meaning that participants meeting the definition of broker will be required to report tax basis and capital gain or loss information (in addition to gross proceeds) for transactions involving these assets. A digital asset is defined as "any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary" (IRC § 6045(g)(3)(D)).
The change to the definition of broker applies to returns required to be filed, and statements required to be furnished, after December 31, 2023. Failure to report is subject to a potential $250 fine per information return or statement, with a maximum penalty of $3 million. Brokers will also be required to report transfers of digital assets (not involving a sale or exchange) to an account or address not maintained by a broker (IRC § 6045A(d)).
The Act also expands the definition of cash in IRC Section 6050I to include digital assets. Section 6050I requires any person engaged in a trade or business who receives more than $10,000 in cash (in one or more related transactions) to file an information return (on IRS Form 8300) with the IRS and to furnish the payor with a statement. This change applies to returns required to be filed, and statements required to be furnished, after December 31, 2023.
Industry participants have expressed concern that the revised broker definition is too broad and might apply not only to crypto exchanges such as Coinbase or Kraken but also to other participants such as validators (for example Bitcoin miners) and software developers.
Other tax provisions in the Act include:
- An early end to the employee retention tax credit under IRC Section 3134, which allows eligible employers to claim a credit against applicable employment taxes for wages paid after June 30, 2021 and before January 1, 2022. The credit is 70% of the qualified wages (up to $10,000) for each employee for the applicable quarter. An eligible employer is an employer who either:
- is subject to a governmental order suspending the employer's trade or business due to COVID-19;
- experiences a substantial decline in gross receipts; or
- is a recovery startup business.
Under changes made by the Act, for the fourth quarter of 2021 only recovery startup businesses can claim the credit. - Adding qualified broadband projects and qualified carbon dioxide capture facilities to the types of exempt facilities that are eligible for tax-exempt financing (applicable to bonds issued after 2021).