Crypto Asset Industry Cautious As Biden Administration Offers New Reporting Rules | Alston & Bird

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Our federal tax group is exploiting recent legislative proposals for amendments that could change the way crypto assets are reported – and taxed.

  • Proposed changes to Section 6045
  • The status of mining and staking activities
  • New proposals from the House Ways and Means Committee
  • Concerns and uncertainties surround any discussion of rewriting the crypto tax law

In recent months, investors and their advisers have been watching closely the Biden administration’s proposals to expand information reporting requirements for cryptocurrencies and other crypto assets. Based on the Treasury Department’s general explanation of the administration’s fiscal year 2022 revenue proposals, released in May 2021 (commonly referred to as the “Green Book”), the administration believes that these reporting requirements Broader approaches would help tackle “a rapidly growing problem” of tax evasion using crypto assets. The Administration’s current proposal would require a broker to report to the IRS information about crypto assets held in its clients’ accounts, including information about passive entities and their major foreign owners. The reporting requirements are intended to apply in a similar manner to the current requirements of Form 1099-B applicable to brokerage and barter exchange transactions. The Green Paper also offers reporting requirements when companies receive crypto assets in transactions with a fair market value over $ 10,000 and for transactions where crypto assets are transferred from a brokerage account to. another. The Administration hopes to benefit from a global automatic information exchange framework for crypto assets and is seeking a mechanism to collect and share this information with partner jurisdictions. However, despite its potential administrative tax benefits, the proposal has both supporters and detractors. Recently, the House Ways and Means Committee proposed to subject “digital assets,” including cryptocurrencies, to the wash sale rules under Section 1091 and the implicit sale rules under Section 1091. 1259, which injects additional uncertainty into the future taxation of crypto assets.

Proposed changes to Section 6045

The declaration of crypto assets is currently part of the bipartisan infrastructure bill before Congress. The Infrastructure Bill aims to expand Section 6045 of the Code to apply more clearly to certain crypto service providers and potentially apply to a wider part of the industry. cryptography. Section 6045 and the Treasury regulations issued under it currently require anyone doing business as a broker to file statements containing the name and address of each of its clients, their gross proceeds on applicable transactions. and some other information. Section 6045 (c) (1) defines a “broker” to include a broker, a barter exchange and “any other person who (for remuneration) regularly acts as an intermediary in relation to goods or services. “.

The Infrastructure Bill would expand Section 6045 to treat as a “broker” subject to certain disclosure requirements “any person who (for a fee) is responsible for regularly providing any service performing asset transfers. digital services on behalf of another person ”. The proposed changes to Section 6045 would define a “digital asset” as: “[e]Unless otherwise specified by the Secretary… any digital representation of value that is recorded on a cryptographically secure distributed ledger or similar technology as specified by the Secretary. Separately, the Infrastructure Bill would amend Section 6045A to require reporting when crypto assets are transferred from one brokerage account to another and also when crypto assets are transferred to a non-broker. Additionally, the Infrastructure Bill treats digital assets as cash for the purposes of Section 6050I, which requires anyone carrying on a business or commercial activity to file an information return relating to a transaction (or multiple transactions). related transactions) when she receives more than $ 10,000 in cash pending from that trade or business.

Policy disagreements regarding reporting requirements

The Joint Committee on Taxation estimates that the crypto reporting requirements proposed in the Infrastructure Bill would bring in more than $ 28 billion over 10 years. Supporters of the requirements cite this estimate of tax benefits and concerns about widespread tax evasion in the crypto industry as reasons to support the proposal. Opponents of the proposal argue that it is too broad and unclear and risks pushing digital asset business activity outside of the United States. Some of these opponents are not totally opposed to additional reporting requirements, but fear that the definition of “broker” used in the infrastructure bill will apply to many parties, such as “minors” and the “stakers”, who do not look like traditional brokers.

Current status of the taxation of crypto assets

There is little guidance on the federal taxation of income from crypto assets. In Notice 2014-21, the IRS listed a series of frequently asked questions. More importantly, the notice announced the IRS ‘view that convertible cryptocurrency is a form of ownership for federal income tax purposes. In addition to Notice 2014-21 and subsequent extensions to Notice with additional FAQs maintained on the IRS website, the IRS issued Rev. Rul. 2019-24, CCA 202035011, CCA 202114020, and CCA 202124008, each of which deals primarily with specific cryptocurrency transactions, leaving many unanswered questions and uncertainty as to their application more generally.

The precedent value of Opinions, FAQs, Tax Rulings, and Chief Legal Advice varies. These are not definitive statements of law, and in many cases tax professionals may disagree with the IRS’s interpretation. Additionally, the lack of administrative guidelines and court decisions regarding the tax treatment of crypto assets makes it difficult to assess the true extent of crypto asset tax compliance issues. The increase in reporting may well highlight more tax controversies in the crypto space, but it is uncertain whether the government’s positions on the federal tax treatment of crypto assets will prevail.

The status of mining and staking activities as an example

Whether the proposed reporting requirements will apply to cryptocurrency miners and stakers remains a matter of debate. Mining and staking are two methods of increasing the ability to record transactions in a particular cryptocurrency and often result in the miner or staker being rewarded with a new cryptocurrency in the form of a new crypto. – currency or user fees. To achieve this goal, miners use computing power to solve complex equations, while players invest units of cryptocurrency as a form of collateral for transactions. Notice 2014-21 sets out the IRS’s position that, for a taxpayer who successfully mines virtual currency, the fair market value of the virtual currency as of the date of receipt from the taxpayer is included in their gross income. In other words, the position of the IRS is that a cryptocurrency miner recognizes taxable income when it is allocated with additional units of the cryptocurrency. The application of the Notice to staking activities is unclear. However, even limited to mining, this position contains layers of complexity. For example, for federal income tax purposes: How much mining does one have to do to be considered engaged in a trade or business in the United States? Can mining a cryptocurrency and then selling it lead to someone being treated as a “reseller”? When should these tax determinations be made? These types of questions are especially important to non-U.S. Or tax-exempt investors who might be interested in investing in cryptocurrency assets, and a lack of clear guidance on reporting requirements compounds these uncertainties.

Conclusion

The uncertainties surrounding the proper federal tax classification of many crypto asset transactions should be part of any tax policy discussion of additional tax reporting requirements for the crypto industry, as this uncertainty combined with reporting requirements increases could encourage investors and vendors to continue their crypto business in non-U.S. jurisdictions.

Notably, the current proposals would grant broad discretion to the Treasury Department to exclude items from the definition of “digital assets,” develop reporting forms, and determine precisely what information should be reported to government authorities. Seemingly minor technical distinctions in these rules could significantly affect the federal income tax on different cryptocurrencies and digital assets. Ideally, Congress and the Treasury Department will develop tax reporting requirements that both address tax policy concerns and are practically achievable from an industry perspective.

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