Infrastructure Bill passes — What it means for crypto investors
Late Friday, the House passed the Infrastructure Investment and Jobs Act (download here). Tucked into the over 1,000 pages of legislation aimed at bolstering the US’s fledgling infrastructure, Congress also included some new information reporting requirements for crypto investors.
Since we already went over the implications of the new reporting rules in a previous blog post, we’ll gloss over that in favor of being more technical here. The meat of this post will focus on the definition of “broker” as it relates to the new reporting provisions, and we will also touch on the new reporting requirements around transfers in excess of $10,000 as crypto is now considered cash.
On page 911 of the bill, §80603 amends the previous definition of broker in the Tax Code to include,
any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.
Essentially, this definition is very broad and could apply to a number of participants in the crypto economy aside from exchanges including miners, those who stake their crypto, and even software developers. This brings up the issue of the IRS attempting to force information reporting onto taxpayers who may not be able to accurately report that information.
Over the summer, Coinbase CEO Brian Armstrong wrote a much-retweeted thread about the implications of the overly-broad definition of brokers on the economy as a whole:
"It’s important to note that Armstrong’s premise was not that increased regulation and reporting requirements are a bad idea — he went so far as to acknowledge Coinbase’s acceptance and willingness to comply — but he believes that such a broad definition of broker may cause unforeseen downstream effects on the US economy."
Some in Congress felt the same way. Sens. Wyden, Toomey, and Lummis worked to propose an amendment to the bill that would narrow the definition of broker to specifically exclude:
validating distributed ledger transactions, without providing other functions or services, or
selling hardware or software for which the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger.
Ultimately, that amendment was not included in the bill that passed Congress.
New Crypto Cash Reporting Requirements
A couple of pages later, §80603(b)(3) of the bill amends the definition of “cash” in §6050I of the Tax Code to include, “any digital asset.” This snippet of text has the effect of pulling all crypto transfers over $10,000 (for a single transaction or a related group of transactions) into the Form 8300 reporting scheme.
Traditionally, banks and brokerages use Form 8300 to report large cash transactions, but the rules technically apply to all “persons” engaged in a trade or business. The form requires the filer to list identifying information about the transacting party including name and Taxpayer ID Number (SSN or EIN). The implications in the crypto space are potentially huge, since outside of exchanges that follow KYC protocols few in the crypto economy routinely collect identifying information from those with whom they are transacting. Under this rule, using DEXs and DeFi applications will become very cumbersome for US citizens, and it is possible that anyone selling NFTs may have to report information collected from buyers.
In general, most crypto enthusiasts agree that some sort of tax reporting requirements are a good thing. Bringing accurate tax reporting to the industry will likely lead traditional investors — those who trade on regulated markets — to increasingly see crypto as a something more than the enigmatic, speculative sector which they currently see. It may even hasten the mass adoption we’re all waiting for that will push BTC and ETH to stratospheric prices. However, there is still work to be done to make sure the new rules will be fair, enforceable, and not have a large negative impact on US innovation. Congress has until January 1, 2023 (when the new rules go into effect) to figure it out.
Original post can be found on Phil's Medium account.