New US Crypto Law
The new US Infrastructure Investment and Jobs Act (“Infrastructure Act” or “Act”) was signed by the United States President, Joe Biden on 15th November 2021. The Act aims to allocate funds to rebuild America’s roads, bridges and rails, expand access to clean drinking water, ensure every American has access to high-speed internet, tackle the climate crisis, advance environmental justice, and invest in communities that have too often been left behind.
The Act is one-of-a-kind legislation as it introduces a new section that adds new tax reporting requirements for holders and traders of digital assets. The new provisions could impact numerous US businesses and consumers who have opted for cryptocurrency for its efficiency, novelty and transparency.
Provisions for Digital Assets
SEC. 80603 of the Act: INFORMATION REPORTING FOR BROKERS AND DIGITAL ASSETS makes amendments to the US Internal Revenue Code for the inclusion of digital assets and digital asset service providers. The amendments are proposed to come into effect in January 2024 and are applicable to transactions involving Digital Assets greater than $10,000. The details of the provisions are provided hereinafter.
The new Act proposes to include brokers of digital assets to come within the purview of Broker.
In the traditional financing industry, a broker is a person who arranges transactions between a buyer and a seller for a commission. Similarly, in the crypto industry, a broker is the middleman between the cryptocurrency market to facilitate buying and selling of cryptocurrencies.
The definition of Broker, for the purposes of IRS, is provided under Return of Brokers. The new Act introduces brokers of Digital Assets, i.e, any person who provides a service causing a transfer of Digital Assets on behalf of another person for a consideration, to come under the purview of the Internal Revenue Code (IRC), so that such transactions are disclosed and can be taxed by the government.
This would apply not just transactions but also to an interest in a company represented by a blockchain token, utility tokens, visual and audio works in the medium of non-fungible tokens (NFTs) or any other cryptographic representation of value that may unfold in the future. Since an art dealer selling NFTs is doing so for consideration, the IRS might require dealers who sell NFTs to file tax information reports on the sale of such digital assets, even if the dealer is using a third-party platform to sell NFTs rather than its own platform to execute its sales.
Another important definition that has been proposed to be amended is the definition of “Specified Securities”. Specified Securities in layman terms mean the securities which are expressly specified by a regulatory authority and are traded on an exchange. The definition of “Specified Securities” provided under the same section is amended to add “Digital Asset” as Specified Security by the Act.
Further, a new definition of Digital Assets would be added in Section 6045(g)(3) by inserting a new Clause (D). The term Digital Asset would mean to include a security that exists in a digital form and represents a value which is recorded on a cryptographically secured distributed ledger or similar technology. The clause also gives the Secretary power to further specify what all can be included under the definition.
II. Furnishing of Information
The information required in connection with transfers of covered securities to brokers lay down the provisions concerning disclosing information relating to the transfer of securities which was earlier limited to traditional tangible securities. The Act aims to amend the sections to now include under its purview, information required for reporting of Digital Assets by introducing a new clause to the section. The amendment requires any Broker, who causes the transaction of a Digital Asset to be made from the Broker’s account to an account maintained by or associated with a person who is not a Broker, to file a return for the calendar year. The form and details of information required would be determined by the Secretary.
Thus, any Broker dealing with transactions involving cryptocurrency or any other type of Digital Asset would be liable to furnish reports and information regarding such transactions in accordance with the provisions to be laid down by the Secretary.
This may intend to cover a transaction where a holder of cryptocurrency on an exchange transfers the cryptocurrency to a personal wallet or a wallet maintained on another exchange, and any business that receives Digital Assets in excess of $10,000 in a single transaction file an Information Return with the IRS.
III. Reporting Penalties
The Act would also amend the rules applicable to “Information Return”. An Information Return is a mandatory form that third parties (e.g., businesses, health insurance providers, financial institutions, and universities) use to notify government agencies and taxpayers about taxable payments.
The term Information Return includes the information required to be disclosed while disclosing the taxable payments. The new Act adds a new provision to this section.
The term “Information Return” would include (after the proposed amendment comes into effect) any return which is required to be disclosed in accordance with the proposed clause 6045A(D), i.e, the information required to be furnished in relation to transactions involving Digital Assets..
Moreover, such a transaction could now be held liable for penalties under S. 6721.
IV. Treatment as Cash for purpose of 26 U.S.C. § 60501
The Act proposed to amend the anti-money-laundering cash reporting requirements provided in the IRS code to encompass transactions in “digital assets.” The new Act will cause an amendment to the definition of “Cash” to the effect that any Digital Asset (as defined in the Act) would be included under the category.
Failure to comply can result in civil penalties of up to $3 million per year — with much higher penalties possible if the failure is due to “intentional disregard” of the filing requirements for information returns and payee statements. In addition, willful violation of Section 6050I is a federal felony, with violators facing up to 5 years imprisonment and corporate violators facing fines of up to $100,000.
The new reporting requirement shall not take effect until 2024. The delayed effective date gives time for the Secretary and the IRS to consider whether to issue regulations clarifying:
- the scope of the definition of digital assets which, in its current form, is broad and ambiguous; and
- the reporting requirements for digital-asset transactions above $10,000.
The Secretary and the IRS are expected to clarify the scope of the Act as applied to digital assets, including the definition of “digital assets,” the scenarios that give rise to reporting requirements, and the particular reporting requirements for digital assets, since they present a risk to companies, consumers, contributors and stakeholders involved in the cryptocurrency sphere.
The Act’s new requirement for businesses to collect and report personal information about the parties to certain cryptocurrency transactions greater than $10,000 could have uncontemplated repercussions due to a lack of clarity in the regulation itself.
This novel Act is a milestone when it comes to the development of regulations in the crypto sector. However, the Act does not lay down specific provisions but instead, the regulations are vague, creating ambiguity and uncertainty. The regulation regarding crypto transactions shall come into force from January 2024 onwards, thus giving the Secretary and IRS sufficient time to lay down, in-depth, the provision clarifying the regulations and making it clear for the digital asset service providers that come under the purview of the new Act.
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