After a long day in session, the U.S. House of Representatives passed the Infrastructure Investment and Jobs Act (H.R. 3684) late at night on Friday, November 5, 2021. The vote was 228-206, with 13 Republican representatives voting in favor of the legislation, while six progressive Democrats voted against the legislation (Ilhan Omar, Cori Bush, Jamaal Bowman, Rashida Tlaib, Alexandria Ocasio-Cortez, and Ayanna Pressley). The Senate already approved the legislation 69-30 on August 10, 2021. President Biden is expected to sign the bill into law over the weekend.
The roughly $1 trillion Infrastructure package includes $550 million in new spending and will fund improvements to roads/highways, bridges, public transit, clean water, the electric grid, broadband internet development, and cybersecurity. Division H of the legislation discusses how the new spending will be funded, including a section relating to digital assets (cryptocurrencies).
At Volt Equity, our Bitcoin Crypto Industry Fund is premised on a bullish sentiment towards Bitcoin and cryptocurrencies in general.
Hence, we will discuss Section 80603 of the Infrastructure package on “Information Reporting for Brokers and Digital Assets” (H.R. 3684, pages 2419-2423). Section 80603 modifies U.S. Code, Title 26, §6045, “Returns of Brokers” and U.S. Code, Title 26, §6050I, “Returns relating to cash received in trade or business.”
New Reporting Requirements for Cryptocurrency Exchanges
1. All cryptocurrency exchanges (Coinbase, Robinhood, etc.) are now considered “brokers” like traditional brokers (Fidelity, Schwab, E*Trade, etc.).
Specifically, the legislation says that “broker” now includes “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” (H.R. 3684, p. 2420). However, there is a problem with this definition, as is discussed in the final section of this article.
2. Definition of “digital asset.”
The term “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” (H.R. 3684, p. 2421).
3. Digital assets are treated like securities, similar to stocks, bonds, and certain types of commodities.
This has been an ongoing area of debate, whether to classify cryptocurrencies as securities or not, so this reporting requirement finally gives some clarity: digital assets will be treated like securities in terms of capital gains/losses. In the past, digital assets were classified as property and thus were taxed based on gains or losses, so the tax treatment of digital assets is essentially the same as before: you must pay taxes on capital gains.
However, securities also face regulation from the Securities and Exchange Commission (SEC) and this legislation makes no mention of the SEC. Traditional securities like stocks force companies to file quarterly reports, provide a prospectus detailing risks, and more. Will cryptocurrencies ever be required to file similar documents with the SEC?
On October 14, 2021, Coinbase released a regulatory proposal that wrestled with whether cryptocurrencies should be regarded as securities, ultimately not making any final decision. The U.S. government has now provided some regulatory clarity, but not enough.
4. Reporting requirements.
Cryptocurrency exchanges must now report information to both the IRS and to their customers. Currently, there are no reporting requirements for cryptocurrency exchanges, although some exchanges may send you tax forms (for example, Coinbase sends 1099-MISC, which only covers rewards received from Coinbase, not capital gains).
The following information is now required to be reported to the IRS and to customers: (1) name, address, and phone number of each customer; (2) the gross proceeds from any sale of digital assets; and (3) capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).
While the legislation does not specify what IRS forms cryptocurrency exchanges must send to their customers, we assume that they must send Form 1099-B (“Proceeds from Broker”), just as traditional brokers do.
5. Penalty for failure to report.
Cryptocurrency exchanges which fail to report such information shall pay a $250 penalty per customer, up to a maximum $3 million penalty (U.S. Code, Title 26, §6722, “Failure to furnish correct payee statements”).
Digital Assets valued at $10,000 or more now treated as “cash” received for any person engaging in a trade or business
Another part of Section 80603 relates to “cash” payments received of more than $10,000.
The legislation makes changes to U.S. Code, Title 26, §6050I (“Returns relating to cash received in trade or business”). Any person engaging in a trade or business that receives more than $10,000 in cash must file IRS Form 8300 (“Report of Cash Payments Over $10,000 Received in a Trade or Business”).
The IRS explains that such information “helps law enforcement combat money laundering, tax evasion, drug dealing, terrorist financing and other criminal activities.”
The Infrastructure package now classifies a digital asset with a value of $10,000 or more as “cash” that must be reported with IRS Form 8300. This form requires the filer to report: (1) the name, address, and TIN of the person from whom “cash” was received; (2) the amount of “cash” received; and (3) the date and nature of the transaction.
Since a person must be "engaged in a trade or business" for U.S. Code, Title 26, §6050I to apply, a $10,000 gift of bitcoin from a friend would *seem* to be exempt from this new reporting requirement.
Effective Date: Crypto Trades in 2023, Tax Filings in 2024
This reporting requirement does take effect until January 1, 2023 and thus affects tax returns filed in 2024. Thus, 2021 and 2022 are exempt from these reporting requirements. This means that exchanges are not required to send you Form 1099-B until 2024 (for 2023 taxes), although we would expect that exchanges would start complying earlier.
However...cryptocurrency gains have always been required to be reported on tax returns!
The main purpose of this legislation is to bring clarity about capital gains or losses from cryptocurrency. In 2014, the IRS clarified that taxpayers are required to report capital gains or losses from cryptocurrency on their taxes.
Because cryptocurrency exchanges have not previously been required to provide reports to their customers (like traditional brokers do), many taxpayers unknowingly failed to report their capital gains from cryptocurrencies, thus cheating the U.S. government out of tax income.
According to the Joint Committee on Taxation, these new reporting requirements will raise about $27.97 billion over ten years.
Legislators have felt that underreporting of cryptocurrency gains was such a problem that in 2020, IRS form 1040 included a new line that asked, “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?”
SO BE CAREFUL: whereas in the past, the IRS didn't have an official record of your crypto transactions, now the IRS will receive information on your crypto trades and could penalize or audit you if you don't pay taxes on crypto gains.
But two problems...
(1) In some cases, it's impossible for exchanges to calculate gains/losses
These reporting requirements are easy to meet if a cryptocurrency exchange handles both the buying and selling. The exchange would know your cost basis and could easily calculate capital gains/losses.
However, exchanges will run into problems calculating cost basis when they are only handling the selling of crypto. Bitcoin is not only received by paying fiat currency; bitcoin can be received directly from other people on the Bitcoin network. Or you can receive bitcoin as payment for goods and services, or even as a gift. A company could pay their employees' salary in bitcoin. A family member could send you bitcoin as a Christmas gift.
Eric Adams, the NYC mayor-elect, has said he will take his first three paychecks in bitcoin. If Adams were to sell the bitcoin he received as salary on Coinbase, what would his cost basis be? Zero? Would his cost basis be the amount that NYC bought the bitcoin for? How could Coinbase even calculate his capital gains/losses since Coinbase is only handling the selling of bitcoin, and didn't handle the receiving/buying of bitcoin? Will Adams end up paying tax twice -- once on his "salary" and a second time on his capital gains?
The new reporting requirements will be challenging for exchanges to implement if customers sell bitcoin that they acquired directly from another person through the Bitcoin network. In such scenarios, calculating the cost basis is tricky and requires more guidance from the U.S. government.
(2) The definition of "broker" is too broad
The definition of "broker" is “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” (H.R. 3684, p. 2420). This could mean that crypto miners, who process crypto transactions between parties, could be held responsible to report information they don't even have access to. This broad definition could potentially also include crypto stakers and providers of digital wallets (both software and hardware wallets).
In response, Senators Ron Wyden (D-OR) and Cynthia Lummis (R-WY) proposed legislation to clarify that "brokers" exclude miners, providers of digital wallets, and developers of new digital assets.