The Biden Administration General Explanations of the Administration’s Revenue Proposals for Fiscal Year 2024 discusses the proposal for exchange of information reporting by financial institutions and offshore digital asset brokers. The proposal for exchange of information stems from the sentiment that tax evasion using digital assets continues to be a rapidly growing problem. The global nature of the digital asset market offers opportunities for US taxpayers to conceal assets and taxable income by using offshore digital asset exchanges and wallet providers. US taxpayers also attempt to avoid US tax reporting by creating entities through which they can act. To combat the potential for digital assets to be used for tax evasion, third party information reporting is critical to help identify taxpayers and bolster voluntary tax compliance. The proposal would be effective for returns required to be filed after December 31, 2025.
The US has not delivered on foreign tax reporting
There is a reality that the US provides less information on foreign accounts at a US financial institution than it receives on US accounts at a foreign financial institution, including offshore digital assets. A jurisdiction’s willingness to share information on an automatic basis with the United States often depends on the United States’ willingness and ability to reciprocate by exchanging comparable information.
The US has reciprocal agreements that are called Intergovernmental Agreements (also known as IGA 1) with 110 nations. These nations are the US FATCA partners. Under the IGA 1, Foreign Financial Institutions are providing the US Treasury with “more” information than what the US is providing its FATCA partners. Here is a simplified summary of what is exchanged:
|FATCA PARTNER TO US||US TO FATCA PARTNER|
|Name, address, US TIN of US Person||Name, address, TIN of person that is resident of FATCA partner|
|Name, address, US TIN of US Controlling Person||NO|
|Account number||Account number|
|Name and ID # of Financial Institution||Name and ID # of Financial Institution|
|ACCOUNT BALANCE OR VALUE||NO|
|Custodial Account interest, dividends and other income (FDAP)||NO|
|Custodial Account gross proceeds from sale/redemptions of assets that produce FDAP||NO|
|Interest paid on depository accounts||Interest paid on depository accounts|
|N/A||US source dividends paid or credited|
|N/A||US source income paid or credited|
In order to ensure that the United States is able to benefit from a global automatic exchange of information framework with respect to offshore digital assets and receive information about US beneficial owners it is essential that US reciprocally provide information on foreign beneficial owners of certain entities transacting in digital assets with US brokers.
The proposal would require financial institutions to:
- Report the account balance (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) for all financial accounts maintained at a US office and held by foreign persons.
- Report the current reporting required with respect to US source income paid to accounts held by foreign persons to include similar non-US source payments.
- Require financial institutions to report the gross proceeds from the sale or redemption of property held in, or with respect to, a financial account held by a foreign person.
- Require financial institutions to report information regarding certain passive entities and their substantial foreign owners. Meaning, a financial institution maintaining an account for a passive entity that is a trust would be required to obtain and report to IRS information on the owner(s) of the trust.
The proposal would require brokers (including US digital asset exchanges) to:
- Report information relating to the substantial foreign owners of the passive entities.
- Report gross proceeds and such other information as the Secretary may require with respect to sales of digital assets with respect to customers, and in the case of certain passive entities, their substantial foreign owners. Therefore, allowing the US to share such information on an automatic basis with appropriate partner jurisdictions, in order to reciprocally receive information on US taxpayers that directly or through passive entities engage in digital asset transactions outside the US pursuant to an international automatic exchange of information framework.
Financial institutions and brokers ought to start preparing to assume greater and expanded reporting responsibilities.
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