The Infrastructure and Investment Jobs Act (IIJA) requires new tax reporting for digital assets under Internal Revenue Code sections 6045 and 6045A. Specifically, the IIJA extends the requirements for how brokers must report transactions involving certain assets (covered assets) on Form 1099-B. These changes were originally set to begin on January 1, 2023.
The Internal Revenue Service recently released Announcement 2023-2 allowing brokers to postpone new digital asset reporting (as of December 23, 2022) until final regulations are issued. Although this transitional guidance provides brokers temporary relief, it does not provide taxpayers relief when reporting.
Existing rules require a person doing business as a broker to file information returns. The current definition of a broker includes a dealer, a barter exchange and any other person who (for consideration) regularly acts as a middleman for property or service transactions.
The IIJA extends this 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. These changes broaden the definition of broker to capture digital asset transactions executed by any platform, exchange, or individual.
Existing rules require brokers to report transaction information for covered securities, meaning stocks, bonds and other debt, commodities, related commodity contracts, and other financial instruments. The IIJA extends the definition to include any digital asset as a covered security.
Digital assets are defined as: "a digital representation of value that is recorded on a cryptographically secure distributed ledger (blockchain) or any similar technology." Examples include non-fungible tokens (NFTs) and convertible virtual currency, such as cryptocurrency (crypto) and stablecoins.
In addition to extending the definition of broker and covered security, brokers must comply with new transfer reporting requirements. When the final regulations are issued, brokers will be required to report to the IRS any digital asset transfers not part of a sale or exchange.
The recent announcement states final regulations will be published, and forms and instructions will be provided after completion of the rulemaking process. However, the announcement did not provide an exact timeline for the process to begin or conclude.
In the meantime, brokers will continue to report gross proceeds and basis as required under existing law and regulations. In addition, brokers will continue to furnish statements on transfers of covered securities as required under existing law and regulations. Brokers will not be required to report or furnish additional information with respect to dispositions of digital assets until new final regulations are issued.
It’s important for financial institutions to stay compliant and make informed decisions when reporting digital asset transactions. Our advisors can help you navigate the complexities and keep up-to-date on the requirements.
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.