On August 10, 2021, the U.S. Senate passed an infrastructure bill containing explicit rules to be inserted into the Internal Revenue Code regarding digital assets. The passage marks the first time that language on this topic has been included in an infrastructure bill. The bill now heads to the U.S. House of Representatives, which is expected to consider it sometime this fall.

The bill defines “digital assets” broadly as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” It requires that certain persons involved in the digital asset ecosystem be treated as “brokers” for purposes of reporting requirements under section 6045 of the Code. Any person treated as a broker is required to file information returns about its customers to the Internal Revenue Service (IRS).

Specifically, the bill’s definition of “broker” includes: “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets on behalf of another person.” As drafted, this language is susceptible to broad interpretation, seemingly not consistent with the Senate’s intent, and raises the issue of persons being required to report information that they do not possess.

In the week preceding the passage of the bill, various senators introduced amendments to limit the scope of the broker reporting provision. A compromise amendment simplified the definition, and specifically provided that miners, stakers and those who sell the software and hardware behind digital asset wallets were excluded from the scope of “broker.”

Although the compromise amendment was reportedly favored by a majority of senators, it fell victim to Senate procedure and never received a vote and was, accordingly, not included in the final bill. Attempts are being made to introduce the language contained in the compromise amendment (or similar language) into an amendment when the House of Representatives takes up the bill, or in other legislation that is being considered by Congress.

Despite the changes to the broker reporting rules having received the most attention, they are not the only important change to digital asset reporting requirements set forth in the bill. Under the bill, brokers must also report any transfer of a digital asset that is not part of a sale or exchange from an account maintained by the broker to an account maintained by a non-broker. This appears intended to target the transfer of a person’s digital assets from an exchange account to a cold wallet (i.e., one not regulated by an exchange).

Further, the bill includes a requirement that, for any person that operates a trade or business and receives payment in digital assets in connection with such trade or business valued at more than $10,000 at the time of the transaction, the recipient must file with the IRS an information return providing certain information (e.g., name, address, social security number) of the person making such payment. The Department of the Treasury also has the authority to write regulations requiring that additional information be reported. Similar to the broker reporting rules, these rules raise the issue of persons being required to report information that they do not possess.

The bill is effective for federal tax returns that are required to be filed after December 31, 2023. Thus, information must be collected for all transactions occurring during calendar year 2023, because such transactions would be reported at the start of 2024.

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