November 2021 Foodman CPA website and JD Supra
crypto asset

Definition of a broker is debated

The Biden Administration’s 2021–2022 Priority Guidance Plan (the Plan) supports a push from the IRS and the US Treasury to more closely scrutinize the virtual currency industry. 

Missing from the Plan? Specifics.

Of note among the 193 guidance projects in the Plan is the“Brokers dealing with virtual assets” section. It deals with information reporting on virtual currency under the §6045 section of the U.S. on “Returns of brokers.” While Brokers got the same heads up in a 2020-2021 Priority Guidance Plan, neither report contains  specifics.

What is different now?

As it becomes clear that crypto asset transactions are continuing to grow, the Biden administration is focused on regulating and taxing the crypto asset industry.

But the situation is far from simple. For starters, the definition of a broker is under debate.

In the past, section 6045 generally referred to real estate brokers. The Infrastructure Bill passed by the The Senate in August expanded the current definition to include: “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The bill has not yet passed the House of Representatives

Until the Infrastructure Bill is signed into law, one can only guess how the definition of “Who is a Broker” will expand.

Why Brokers Are Targeted

The Administration and the IRS believe that the digitalized pseudo-anonymous nature of crypto transactions opens an opportunity for taxpayers to conceal crypto assets and crypto taxable income. Therefore, the IRS believes third party information (1099 Forms) is the best tool for identifying taxpayers in the crypto playpen and increasing their tax compliance.

Although there are crypto brokers who generate 1099 Forms, many don’t. Since there is no specified crypto tax reporting regulation for brokers, the reporting burden actually lies with taxpayers. Either because of confusion about the rules, or a desire to avoid them, taxpayers largely ignore crypto transaction reporting.  Hence the IRS’ proposed focus is on reporting virtual currency asset gains under §6045. 

Regulating and defining crypto

Currently, a clear reporting requirement exists for crypto taxation. However, it’s in a place that nobody in the public is likely to read on the IRS website.

Toward that end, The General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals states that “reporting requirements would apply in cases in which taxpayers buy crypto assets from one broker and then transfer the crypto assets to another broker, and businesses that receive crypto assets in transactions with a fair market value of more than $10,000 would have to report such transactions.”

In spite of the IRS position that cryptocurrency is not currency, this strangely resembles large transaction currency reporting requirements.

That’s a reporting trigger that is one half of the current $20,000 transaction reporting requirement resulting from the litigation of John Doe summonses to certain crypto exchanges.

In the hot seat

In its usual language, incomprehensible for most of the American public, the Explanations state that  “The proposal would require brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker.”

Translation: brokers and exchanges are in the hot seat for crypto transaction  reporting.

The IRS knows that it needs help. The plan requests “the insight and experience of taxpayers and practitioners who must apply the rules. Therefore, we invite the public to continue to provide us with their comments and suggestions as we write guidance throughout the plan year.” ©