By Jasper Hamill
The crypto sector is facing new rules and regulations after President Biden signed the controversial $1.2 trillion bipartisan infrastructure bill into law on Monday afternoon.
It is hoped the Infrastructure Investment and Jobs Act (IIJA) will give the economy a shot in the arm, by delivering $550 billion over five years to fund rail, roads, bridges, ports, waterways, and airports.
However, there is a sting in the tail for the crypto sector. The bill has been described as a “crypto tax” mandate because it contains new rules designed to raise tax revenue from the buying and selling of cryptocurrencies and digital assets.
So how should the sector prepare for the changes? Adam Goldberg, director of platforms, regulatory, and compliance services at IHS Markit, shared his advice with Gokhshtein Media to help the crypto industry deal with the changes.
He said: “Financial firms based in the US - such as cryptocurrency exchanges and banks - planning to offer digital assets to their clients should be prepared to comply with the new reporting rules when they come into effect for the 2023 tax year. Foreign exchanges and financial firms that allow U.S. clients to transact digital assets are also expected to be subject to the regulations.”
The most important part of the IIJA for crypto investors is a provision called "Information Reporting for Brokers and Digital Assets", which contains new rules for digital-asset brokers.
A broker is defined as "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”. If you buy and sell crypto for someone else, this section will affect you. If you’re a miner or a developer, you probably don‘t need to worry.
Goldberg added: “Treasury and the IRS will also have to write regulations pertaining to the mandated disclosures to clients that are included in the provision. In addition to reporting on transactions that go to unknown addresses or persons, digital asset brokers will also have to deliver a tax form to all their clients, establishing a taxable basis in the digital assets they transact through the broker each year.
“It is widely expected that the final regulations will exempt validators, miners, and software developers from the reporting requirements included in the IIJA.”
Firms that offer crypto broker services will have to upgrade their know-your-customer (KYC) systems to ensure that they can properly identify their clients, their accounts and addresses, as well the owners of these accounts, and the accounts and addresses to which their clients will be transferring digital assets.
“This will be of paramount importance since reporting obligations would kick in at the point when a broker is unaware of the account or address to which the digital asset is being transferred,” Goldberg warned.
“Additionally, firms must upgrade their tax-preparation capabilities including the possibility of cost basis calculations, since they will have to produce increased volumes of Forms 1099 issued to all their U.S. account holders on an annual basis after 2023.
“And, in order to properly report U.S. account holders to the IRS, cryptocurrency exchanges will likely be required to collect certified TINs as part of a Form W-9 remediation. There is also a risk that the IRS could expand the information reporting to transfers by non-U.S. clients in the final regulations.”
The Infrastructure Bill has not been universally welcomed by the crypto sector. Jerry Brito, executive director of the Coin Center think tank, said some aspects of the law were “unconstitutional”.
He tweeted: “Despite our best efforts, the infrastructure bill has passed with the terrible crypto tax reporting provisions. The fight is not over yet, however. We have several paths to continue to pursue a fix.
“It's important to note that the crypto provisions will not take effect until Jan. 1, 2024, so there is time to roll back this law before it affects anyone.”
Other observers questioned the definition of “brokers”, warning that it was too vague and could end up criminalizing innocent people.
A report from The Proof of Stake Alliance suggested that someone who receives an NFT could end up behind bars.
“An overlooked provision — an amendment to tax code section 6050I — in the infrastructure bill passed by the Senate and now pending in the House could make receiving digital assets (whether that be cryptocurrency, an NFT, or any other digital asset) a felony if not reported correctly. This provision, which would apply to all Americans who receive any kind of digital asset, has thus far escaped public or congressional scrutiny,” the Alliance wrote.
“The proposed amendment to Section 6050I states that, in a broad range of scenarios, “any person” who receives over $10,000 in digital assets must verify the sender’s personal information, including Social Security number, and sign and submit a report to the government
within 15 days. Failure to comply results in mandatory fines and can be a felony (up to five years in prison).“
