Long-awaited proposed regs clarifying information reporting and basis determination rules for digital asset transactions under the Infrastructure Investment and Jobs Act are a step in the right direction and demonstrate Treasury’s commitment to understanding the crypto ecosystem, according to a former senior IRS official.
Enacted almost two years ago in November 2021, the IIJA established first-of-their-kind digital asset transaction reporting requirements as Congress took a crack at pinning down who exactly is responsible for furnishing information to the IRS and cryptocurrency customers. The bill included definitions for digital assets and “digital asset brokers,” the later of which was criticized for being unhelpfully broad in scope.
As such, the IRS delayed digital asset broker provisions originally set to go online this year until the issuance of final regs. After much speculation and anticipation from the crypto and tax communities, proposed regs were released at the end of August to clear up confusion surrounding what the IRS expects to be supplied from brokers moving forward. For a high-level overview of what’s included in the regs as well as a link to the regs in full, see IRS Issues Prop Regs on Reporting by Brokers For Sales and Exchanges of Digital Assets (08/28/2023).
“The issuance of these proposed regulations is a big step,” Head of Government Solutions at TaxBit Miles Fuller, who served as senior counsel at the IRS Office Of Chief Counsel, told Checkpoint in an interview. “It’s a pretty huge milestone in the tax world.” Overall, Fuller said the regs address the “administrative burden of filing taxes” in what he described as a “somewhat difficult” space when it comes to corralling data from “different places.”
“Now we’re going to move to a framework where individuals are getting a form from their broker that says: ‘Hey, here’s what you bought and here’s what you sold. And here’s what your gain and loss [is] for tax purposes; what your income was’ – all of those components,” said Fuller. “That should make the tax reporting burden easier on the population … and it’s something that is concrete.”
The proposed regs provide that digital asset brokers include any person that provides facilitative services that effectuate sales of digital assets by customers, provided the nature of the person’s service arrangement with customers is such that the person ordinarily would know or be in a position to know the identity of the party that makes the sale and the nature of the transaction potentially giving rise to gross proceeds.
Fuller was unsurprised that centralized exchanges were included in the digital asset broker bucket, something “everyone was comfortable with,” but there was an anxiousness over if crypto miners and stakers would be as well. According to Fuller, “the regulations very clearly say they are not included, so that’s good.” The gray area, he continued, is with digital asset wallet providers and decentralized financial protocols. The line in the sand Treasury attempted to draw was the degree of autonomy, or in other words, a lack of human oversight.
Wallet providers that are limited to providing private and public keys would not be considered brokers, Fuller explained, adding that in recent years, wallet providers have been “embedding or bundling services” allowing customers to trade crypto that would then, under the proposed regs, make them brokers.
As for decentralized finance, or colloquially known as “DeFi,” Fuller said the government has created a “multifactor test” reliant on a “facts and circumstances analysis” to determine if a protocol is truly autonomous. Such an autonomous protocol “gets created and pushed out into the ether on a blockchain somewhere and runs with no connection to any person anywhere or any company.”
He said he will be interested to see what comments arise on this “squishy” test during the 60-day public comment period, as this distinction for broker definition purposes is unclear. Specifically, the “position to know” component may need to be refined, Fuller said. However, this is in line with Treasury’s approach internationally, such as under the Bank Secrecy Act “and other aspects of the law that aren’t necessarily tax specific.”
Curiously missing from the proposed regs is mention of a Form 1099-DA, a digital asset-specific information return that has been teased by the IRS. But Fuller believes the regs “allude to” a new form that will be used to report the different data points brokers will need to collect, especially items not currently asked about on Form 1099-B like “transaction hashes or wallet addresses.”
It should be noted, though, that the regs phase in reporting requirements over time to, firstly, promote voluntary compliance, and then ease into the new rules. Digital asset brokers will need to know cost basis information for transactions beginning January 1, 2023. Starting tax year 2025, gross proceeds reporting will be mandatory, as well as adjusted cost basis reporting beginning tax year 2026. Where a Form 1099-DA fits into this roadmap remains to be seen.
A public rulemaking hearing is scheduled for November 7 with the possibility of a second hearing date the following day to account for a potential high number of speakers. Fuller said the way the wind is blowing “almost certainly” indicates it will be a two-day event.
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