Infrastructure Investment and Jobs Act Expands Tax Reporting Obligations on Digital Asset (Including Cryptocurrency) Transactions

Code Section 6045 and the Treasury regulations thereunder generally impose Form 1099-B reporting obligations on brokers. The Act will expand Code Section 6045 to impose Form 1099-B (or similar) reporting obligations on “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” As a result, those who regularly provide services effectuating cryptocurrency transactions on behalf of others will be required to file returns showing the name and address of each of their customers as well as information such as gross proceeds. The term “digital asset” generally means any digital representation of value that is recorded on a cryptographically secured distributed ledger.

The expanded “broker” definition potentially subjects miners, validators, developers, and other parties to the Form 1099-B reporting obligations. The current Section 6045 Treasury regulations are drafted to apply to brokers as principals or agents who act on behalf of customers. However, the Treasury has yet to provide guidance restricting cryptocurrency “brokers” to those acting on behalf of customers, and it is unclear whether it will do so prior to the date the amendments go into effect. Investors, including investment funds, who use their digital assets to validate transactions are potentially affected.

Under Code Section 6045(g), brokers are required to provide additional information on their returns for transactions involving “covered securities.” The Act will expand the definition of “covered security” under Code Section 6045(g)(3) to include digital assets transferred in certain transactions. These additional reporting requirements will apply to digital asset transactions on or after January 1, 2023, and, when applicable, will require brokers to report customers’ adjusted bases in such assets and whether any gain or loss with respect to such assets is long- or short-term.

The Act also amends Code Section 6045A to require persons who transfer a “covered security,” including a digital asset, to a broker on or after January 1, 2023, to provide the broker with information that will enable such broker to comply with its “covered securities” reporting obligations under Code Section 6045, such as tax basis and holding period information. In addition, when a broker transfers a covered security, including a digital asset, from an account maintained by the broker to an account not maintained by a person the broker knows or has reason to know is also a broker, the broker will be obligated to make a return with this information and will be subject to penalties upon failure to do so.

Congress chose to specially define “digital asset” for these information reporting requirements. While also including such assets in the definitions of “covered security” and “specific security” under Code Section 6045 (which also covers commodities transactions), the statutory language indicates a consistency with the Internal Revenue Service’s position of treating cryptocurrency as property.

These reporting requirements for “covered securities” are intended to standardize reporting and place reporting obligations with respect to most securities on the broker rather than the customer. The Act ensures that brokers are similarly responsible for reporting such information for digital assets transactions that occur on or after January 1, 2023.

Code Section 6050I imposes reporting obligations on certain “cash” transactions. The Act amends the definition of “cash” under Section 6050I to include digital assets, imposing reporting obligations on persons engaged in a trade or business who, in the course of that trade or business, receive more than $10,000 in digital assets or in a combination of digital assets and other cash in one transaction.

These reporting obligation amendments do not create new tax obligations, and amounts reported pursuant to such obligations are not necessarily taxable income. Rather, the reporting obligations allow the Internal Revenue Service to collect additional information and better assess taxes on cryptocurrency transactions. As this will likely result in increased compliance with tax laws, taxpayers may consequently pay more in taxes.

Taxpayers engaged in digital asset transactions should consider their potential reporting requirements under these new rules and stringently review their contractual counterparties to assess whether such counterparties are able to meet such requirements as well. The expanded reporting obligations are broad and do not expressly authorize that these obligations can be delegated, thus the Treasury and Internal Revenue Service will likely have to publish guidance to render them easier to operationalize.

For further analysis on the bipartisan infrastructure bill, please see our Sidley Update here.