11.12.2021

Impact of New Digital Asset Reporting Rules

By Adam Goldberg, director, platforms, regulatory and compliance services, IHS Markit

One of the most prominent financing provisions of Infrastructure Investment and Jobs Act (IIJA) is a reporting provision designed to raise additional tax revenue from the buying and selling of digital assets and cryptocurrencies. The provision entitled “Information Reporting for Brokers and Digital Assets” mandates that all digital asset brokers (as defined by the IIJA) must report any digital-asset transfer in which the digital-asset is moved to account where the person or address is unknown to the broker. The provision states that a digital-asset broker will constitute, “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

Once the IIJA is formally signed by President Biden (a signing ceremony is expected to take place the week of 15 November 2021), the Department of Treasury will be responsible for drafting regulations to implement the “Information Reporting for Brokers and Digital Assets” provision. 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.

Business Implications

U.S.-based financial firms–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. Firms will also have to upgrade their KYC systems to ensure that they can properly identify their clients, their accounts and addresses, the beneficial 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.

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.

Source: IHS Markit

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