As the usage of Bitcoin, Ether, and other cryptocurrencies proliferates throughout the US economy, it may seem inevitable that a comprehensive regulatory regime will sprout up around these novel assets. Thus far, the regulation has been piecemeal, primarily limited to pronouncements from the Internal Revenue Service (IRS), the Securities and Exchange Commission, and the Office of the Comptroller of the Currency covering the individual aspects of cryptocurrency that fall under each agency’s purview.
Over the years, Congress has contemplated enacting such a wide-ranging cryptocurrency regulatory regime; its members have held hearings, solicited comments, and drafted dozens of bills on the subject. Despite the buildup, Congress’ first intervention in the world of cryptocurrency was quite limited. On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (the Act) into law, appropriating billions of dollars for infrastructure improvements and other government projects. However, beyond just appropriating funds, the Act also created a new reporting regime for cryptocurrency transactions.
Specifically, the Act created two new reporting obligations. Prior to the Act, Internal Revenue Code Section 6045 required “brokers” that are dealers/middlemen in “covered security” transactions to issue a Form 1099-B to both the brokers’ customers and the IRS identifying the sales of securities through the broker, the customer’s adjusted basis in the security, and the proceeds from the transaction.
The Act expanded the 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.” The Act also expanded the definition of “covered security” to include “digital assets,” 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.”
In addition to expanding the Form 1099-B reporting obligation, the Act expanded the requirement under Internal Revenue Code Section 6050I that banks and other businesses report certain cash transactions in excess of $10,000 to the IRS to include reporting similar transactions undertaken with digital assets. Both of these provisions go into effect with returns and statements required to be filed after December 31, 2023.
As with any new legislation, there are several open issues with respect to these expanded reporting obligations. First, the extent of the revised definition of a broker is unclear. Does it apply to cryptocurrency miners? Does it apply to software developers who work in the cryptocurrency space? Second, the scope of the newly defined “digital assets” is opaque. As of this newsletter, there are hundreds of cryptocurrencies in circulation, each with slightly different characteristics. Further, there has been rampant growth in the market for non-fungible tokens (NFTs), which can demonstrate ownership of virtual assets or tangible assets. Will all cryptocurrencies and NFTs be subject to the rules related to “digital assets”?
Both Treasury and Congress are aware of these issues. Treasury has indicated that it will be promulgating regulations clarifying its view on these definitions in the very near future, though it has yet to tip its hand on their substance. Meanwhile, a bipartisan group of senators have expressed sympathy toward the concerns of cryptocurrency users and have already proposed amendments to the new reporting regime. Whether Treasury adopts a broad or narrow interpretation of “broker” and “digital assets,” these senators will likely push legislation furthering their own interpretation of the reporting requirements.
The legal treatment of cryptocurrency is a rapidly developing field, and impacted industries need to monitor legislative (both federal and state) and agency developments in order to stay in compliance. Keep an eye on this space for news and analysis of developments related to cryptocurrency.