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On November 15, 2021, the Law on Investments in Infrastructure and Employment was adopted (PL 117-58) was signed by President Joe Biden. Section 80603 of this bill, entitled “Information Reporting for Brokers and Digital Assets,” introduces new requirements for brokers in the Internal Revenue Service’s (IRS) Revenue Code. The Code definition of “broker” is amended by the following language from section 80603:
“any person who is responsible (for a fee) for the regular provision of any service that transfers digital assets on behalf of another person.”
Any person or entity determined by the IRS to fall within this definition is subject to the new IRS reporting requirements for taxation purposes as detailed in the bill. Furthermore, the Code has been amended to include a definition of “digital property”:
“[e]unless otherwise specified by the Secretary, the term ‘digital asset’ means any digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology designated by the Secretary.”
Elliptic generally welcomes measures that seek to clarify the regulatory requirements of cryptoassets. We also support efforts to ensure that the cryptoasset space does not enable widespread tax evasion. However, we believe that the wording used in these definitions is too open-ended and may have serious implications for those involved in the crypto-asset ecosystem, while failing to achieve the goal of improving tax compliance as intended.
If a broad interpretation of the definition of “broker” is put into practice, it could subject a wide variety of blockchain network participants, such as miners and software developers, to IRS reporting requirements. Industry participants have qualified this law threatens over-regulation given that many of these ecosystem participants may not be able to comply with the technical requirements and may not be in a position to provide meaningful information to the IRS about individual cryptoasset users.
While it is not inevitable that regulators will apply the definition of broker in such a broad and unreasonable manner, the loose nature of the definition certainly creates a risk that this could happen. If left as drafted, the provisions in Section 80603 could slow innovation in the cryptoasset industry by potentially burdening an unnecessary number of ecosystem participants with reporting requirements they could not meet. Additionally, the bill raises privacy concerns as the aforementioned participants would have to collect and report information about users interacting on the blockchain. In the current ecosystem, such participants do not hold personal data.
To mitigate the impact of the uncertainty created by Section 80603, Elliptic offers four recommendations for amending its provisions:
Key recommendations
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Limit the definition of “broker” to persons and entities that perform crypto-asset brokerage activities on behalf of clients (similar to how FinCEN clearly defined the distinctions between “users, exchangers and administrators” in clarifying the scope of its money services business regulations).
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Clarify customer and transaction information that brokers must hold in the context of crypto-asset activity.
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Clarify reporting requirements for brokers when transacting with unknown cryptoasset wallets.
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The Secretary of the Treasury should consult with industry stakeholders to understand the implications of changes in the Internal Revenue Code to the crypto-asset ecosystem, and Congress should continue such engagement as it drafts subsequent legislation.
Most of the changes to the Internal Revenue Code required under the new provisions will not become applicable until at least 2023. As mentioned above, the Secretary of the Treasury is responsible for determining the scope of some of these changes. Therefore, there is an opportunity for industry stakeholders to join forces and engage with US authorities to clarify and amend the cryptocurrency reporting requirements introduced in the Code.
Ultimately, improved legislation would be the best outcome for all participants and stakeholders. The starting point for solving this challenge is the proposed measure introduced in the House of Representatives on November 17, 2021. HR 6006 “To amend the Internal Revenue Code of 1986 to clarify the definition of broker and for other purposes”. If passed, this proposal would provide certainty to consumers, industry and America’s contributors to blockchain technology. Elliptic supports this bipartisan initiative and believes that providing clear rules to the industry will support our vision of a secure, compliant and financially inclusive crypto-asset ecosystem.
Other initiatives have recently been launched that may offer a way forward. Senator Wyden and Lummis introduced the bill which amended the definition of “broker” to exclude key blockchain participants such as miners from reporting requirements. Senator Ted Cruz went further and introduced legislation to completely repeal these new reporting requirements and additions to the definition of “broker”.
As a provider of blockchain analytics tools, Elliptic remains committed to engaging with regulators and industry participants around the world to coordinate regulation. To keep up with the big changes in the crypto industry, subscribe to our weekly regulatory affairs newsletter.
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