Back To The Future … Cryptocurrency Tax Reporting – Tax Authorities

The cryptocurrency industry may be breathing a sigh of relief
following the release of recent IRS guidance on cryptocurrency tax
reporting, which effectively postpones the January 1, 2023
effective date of the digital asset broker rules and reporting
obligations enacted by the 2021 Infrastructure Investment and Jobs
Act (the “Act”) under Sections 6045 and 6045A. See
Announcement 2023-2 (the “Announcement”)
linked here. While this effective delay may
be good news for cryptocurrency market participants potentially
subject to these reporting rules, retail cryptocurrency investors
may not receive IRS Form 1099-Bs covering their cryptocurrency
investments this tax season and so may need to continue to make do
with the improvised system that the cryptocurrency industry has
implemented in past years.

Prior to the Act, cryptocurrency market participants struggled
with how the tax reporting rules of Sections 6045 and 6045A applied
to cryptocurrency, as these rules were not drafted with
cryptocurrency in mind. Thus, the cryptocurrency industry has been
left to its own devices to answer such basic questions as (1) who
must report (e.g., exchanges, miners, stakers, and
others), (2) what must be reported (e.g., gross proceeds,
tax basis, and other information), and (3) to whom must the reports
be provided (e.g., IRS, customers, and others). With the
delay of reporting rules, cryptocurrency tax reporting remains
muddled, and the reporting itself will be a crazy quilt of ad
hoc interpretations of existing law.

As amended by the Act, Sections 6045 and 6045A impose mandatory
tax reporting requirements for brokers of certain digital asset
transactions entered into after December 31, 2022. Section 6045
requires brokers to report on IRS Form 1099-B certain information
about taxpayers, including names and addresses, as well as certain
information about the property underlying the transaction,
including the sale date and gross proceeds of a sale (and for
so-called covered securities, the adjusted basis of the property
sold and the character of any gain or loss) as well as furnish
payee statements to customers. For transactions between brokers,
Section 6045A further requires transferors of covered securities to
furnish transfer statements to transferees. The Act expanded
Section 6045’s definition of “broker” to include
“any person who (for consideration) is responsible for
regularly providing any service effectuating transfers of digital
assets on behalf of another person.” Additionally, the Act
provides that digital assets, defined as “any digital
representation of value which is recorded cryptographically,”
could be treated as covered securities.

Concern has been expressed that the Act’s broad definition
of “broker” could subject many cryptocurrency market
participants not traditionally viewed as brokers (e.g.,
miners, stakers, etc.) to reporting requirements as discussed here and in the legislative history to the Act
linked here. As included in the Announcement,
Treasury plans to provide further guidance on what constitutes a
broker for purposes of Sections 6045 and 6045A, address the
application of Sections 6045 and 6045A to digital assets, and
provide forms for broker reporting. The Announcement provides
interim relief in advance of the January 1, 2023 effective date and
provides that until final regulations are published, digital asset
brokers may rely on the law in effect as of the date of the
Announcement, December 23, 2022 (i.e., prior law).

Pursuant to the Announcement, digital asset brokers may report
the gross proceeds of certain sales and adjusted basis of property
and may furnish statements on transfers of covered securities but
will not be required to provide additional information with respect
to dispositions of digital assets, issue additional statements, or
file returns with the IRS on digital asset transfers. The
Announcement does not, however, address the extent to which certain
digital asset transactions may otherwise be subject to Sections
6045 and 6045A absent additional guidance. Thus, cryptocurrency
market participants are left to decipher their reporting
obligations under prior law. The IRS has provided no guidance to
date on the applicability of existing regulations under Sections
6045 and 6045A to cryptocurrency specifically. As a result, the
cryptocurrency industry and specifically cryptocurrency exchanges
have been left to review the existing guidance under Sections 6045
and 6045A, which was not specifically designed to address
cryptocurrency transactions, in order to ascertain their reporting
obligations, if any. Accordingly, the reporting provided by
cryptocurrency exchanges is not uniform in the marketplace, and
many exchanges do not provide IRS Form 1099-Bs to their
customers.

Clarity may be coming soon as a draft of proposed regulations is
currently under review by the Office of Management and Budget.
While the content of these regulations remains uncertain, it seems
plausible that the regulations may narrow the definition of
“broker” as Treasury indicated in a letter to various
U.S. senators in February 2022 that ancillary parties such as
stakers or miners, persons selling storage devices, and persons
writing code should not be subject to reporting requirements. The
regulations will also likely address issues inherent in
cryptocurrency reporting − namely, the decentralized nature
of cryptocurrency, that may make compliance with the broker
reporting rules onerous. That is, in many cryptocurrency
transactions, it is unlikely that either party may have the
requisite information (e.g., names or addresses) or access
thereto as the ledger does not provide this information. If
Treasury’s earlier statements are any indicator, it is likely
that future guidance will provide some comfort for the
cryptocurrency industry.

Until these regulations are finalized, some cryptocurrency
customers currently receiving IRS Form W-2s for wages and IRS Form
1099-INTs for interest may not be receiving IRS Form 1099-Bs for
their cryptocurrency investments. For now, it is status quo
ante for cryptocurrency tax reporting.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.