IIJA – Impact on Virtual and Cryptocurrency
The IIJA contains two provisions that affect the cryptocurrency industry. The first provision is that IRC § 6045 was amended to require brokers, or anyone "responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person," to report digital asset transactions on Form 1099-B in a way similar to many securities. Reported details include sale proceeds, basis, and dates. The Act defines a "digital asset" as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. The issue related to Form 1099-B is whether the IRS regulations will be revised to define who meets the definition of “broker” for reporting purposes.
The second modification contained in the IIJA requires digital assets to be treated as cash for $10,000 reporting purposes. Under IRC § 6050, crypto transactions in excess of $10,000 must be reported on Form 8300. Thus, digital assets are treated like cash. Both of these reporting changes take effect for transactions occurring after January 1, 2023, and for reports due after December 31, 2023.
Additional Policies from the Biden Administration
Executive Order - On March 9, the president signed an executive order outlining his digital asset plan, calling for more oversight over cybersecurity and bad actors by effectively centralizing the digital asset world. This begins with a review of a potential Central Bank Digital Currency (CBDC). Biden instructed a concert of top agency officials to, within 180 days, submit a report on "the future of money and payment systems." This review will examine digital payment technologies, the interplay of related market forces, and the effect upon the U.S. economy.
Green Book – In March the Administration released the Green Book, which serves as a platform for outlining the President’s budget proposals for the next fiscal year. The Green Book contains three items related to cryptocurrency.
The first item relates to crypto lending and would provide that securities loan nonrecognition rules apply to loans of actively traded digital assets recorded on cryptographically secured distributed ledgers if the loan terms are similar enough to securities loans. This would apply to tax years beginning after December 31, 2022.
The second requirement relates to foreign digital assets. Under the Foreign Account Tax Compliance Act, US taxpayers holding an aggregate value of over $50,000 in cryptocurrency in a foreign digital asset account would report this information to the IRS. This would focus on tax avoidance behavior by crypto investors and apply to returns filed after December 31, 2022.
The third provision states that the US would bolster its automatic information sharing with other countries. Specifically, U.S. digital asset exchanges would have to disclose information on substantial foreign owners of some passive entities. Certain financial institutions would also need to report the account balance "for all financial accounts maintained at a U.S. office and held by foreign persons." This includes digital asset brokers, likely under the definition provided by the IIJA. The proposal would be integrated with existing law and be effective for returns filed beginning 2024.
Global Tax Enforcement
The Joint Chiefs of Global Tax Enforcement (J5) issued a statement on May 10, 2022, regarding NFTs. The J5 is designed to combat transnational tax crimes and avoidance. It is comprised of tax officials from the US, Canada, Australia, Great Britain and Netherlands. The J5 issued a warning regarding the use of NFTs and cryptocurrencies. The J5 is convening a meeting to review money laundering, scams and counterfeit NFTs in the digital asset marketplace.
State Taxation of NFT Transactions
As the market and landscape for NFTs develops, it is only a matter of time before states seek to tax these transactions. However, one of the complications with imposing sales tax on NFT transactions is that blockchain transactions are not only transparent and immutable (the data can be seen by everyone and cannot be changed), but they are pseudonymous (under a false or unknow name). Even though the authenticity of blockchain transactions can be verified, the parties involved in the transaction are not generally identified. As a result, the sellers of NFTs may lack the information regarding the location of the buyer to collect and remit sales tax. However, since the IIJA as noted above, will require brokers and persons with trade or business who receive $10,000 or more of digital assets to collect information on parties to a digital asset transaction, information may become more readily available for states to source these transactions for purposes of sales tax and income tax apportionment.
If you are engaging in business or have investments in connection with digital assets, RVG and Company can guide you through the tax and business issues related to this emerging issue.
2020 RVG & Company