When the U.S. infrastructure bill was signed into law on November 15, 2021, it changed the crypto industry forever. A new age of regulatory reporting was ushered in, which means that not only individuals, but also brokers must now report their crypto activities to the relevant authorities.
It’s not the finished product by any means. Indeed, it specifically requests that other arms of the U.S. financial system, in particular the U.S. Treasury Department, follow up with specific rulings.But for all intents and purposes, it’s the start of a new era for crypto, more closely aligned with the traditional financial industry.
The new reporting requirements are the first stage in taxing the crypto market. That’s why it was included in the infrastructure bill. The digital is going to pay for the physical.
“We are looking at crypto taxation from two different vantage points,” says Erin Fennimore, who works as the global head of information reporting solutions at TaxBit. “First from the vantage point of the individual taxpayer, capital gains or income from crypto was always subject to personal taxation. But from the side of the cryptocurrency exchange, facilitating that trading and making those payments. Well, what's new for them?”
The answer to that can be split into two. The bill defines digital assets and expands the definition of a digital broker. This by necessity will capture much of the activity involved in crypto trading and investment. It then makes digital assets covered securities. This makes them exempt from individual state’s restrictions and regulations, so they are treated the same nationally.
Finally, the bill imposes increased 1099 reporting, including transfer reporting, and new Form 8300 reporting requirements for businesses accepting payments of $10,000 or more in digital assets.
While these definitions and reporting requirements add a welcome layer of clarity to what is expected, there are still lots of gray areas that companies need to navigate.
“The operational considerations are vast when you get into it, and it will require a lot of collaboration between crypto companies and the software tools that will enable them to produce 1099 reports,” says Rob Massey, who serves as the global and U.S. leader of blockchain tax and digital assets at Deloitte.
“The issues include what valuation to put on a 1099 to report proceeds and on what basis you are making that valuation. We also don't have clear guidance yet on how to make sure that you're respecting the basis on which you are reporting in terms of size,” he says.
“There is also the question of cut-off. Crypto doesn't sleep and trades 24/7, so what time zone cut-off are you using? These are just some of the many operational considerations that those who facilitate digital asset transactions need to be thinking about,” Massey adds.
According to Fennimore, crypto brokers and exchanges should now be focusing on what information they need and the procedures they have to follow to actually produce 1099 forms. And that starts with on-boarding.
“I think the biggest overall change is around the certified taxpayer ID situation,” she says. “Brokers are now required to collect a certified tax ID, which cannot be done over the phone or by email. It's a little bit more rigorous, and it needs to be collected under penalties of perjury, which is commonly known as a form W-9.”
Crypto firms need to take this seriously, because the penalties for not doing it or doing it incorrectly are fierce.
“These are the rules, and if you don't get the right information, the backup withholding rates are 24%, and that's on gross and that sticks to the broker,” says Massey. “That usually gets people’s attention.”
The new requirements necessitate a wide-ranging response from crypto companies. That includes looking at changing internal processes and how they match up with the software tools that need to be used. It requires making decisions around protocols on issues such as valuations, cut-offs and definitions of client types. It also requires a lot of client education, not least to explain why these decisions have been made. It’s a brave new world for the crypto industry. And it’s here to stay.
Erin Fennimore and Robert Massey were speaking at the CoinDesk Webinar “Crypto Regulations: What the Infrastructure Bill Means for Your Business,” moderated by Quincy Enoch, co-chair of the financial services practice group at Invariant.
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