Roger M. Brown is Chainalysis’ Global Head of Tax Strategy.
The Infrastructure Investment Jobs Act (“Infrastructure Act”) that President Biden signed into law on November 15th contains five provisions that will require exchanges (or “brokers” under the language of the Act) to report the following to the IRS:
- Proceeds from taxable sales and exchanges of digital assets;
- Tax basis and holding period for digital assets sold;
- Transfers of digital assets to other exchanges;
- Transfers of digital assets to wallet addresses which are not attributed to other exchanges (e.g., cold storage devices); and
- Receipt of more than $10,000 in digital assets in one or more transactions. Unlike these other provisions, this provision applies to any business and not just brokers.
Reporting will be required for sales, exchanges, and transfers occurring in 2023 on information returns sent to the IRS. Thus, exchanges and certain other businesses will have circa thirteen months to develop or acquire new software solutions to comply with the new provisions.
A note on terminology: Congress adopted the phrase “digital asset,” in lieu of “cryptocurrency” or “virtual currency” – the latter of which has been the predominant phrasing by the Internal Revenue Service since 2014. “Digital assets” under the Infrastructure Act are defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the [Treasury Department].”  This definition is broad enough to include NFTs in addition to many of the different types of digital assets traded on platforms of brokers (exchanges).
The discussion below will use the “broker” and “digital asset” phraseology under the Infrastructure Act, in lieu of the words “exchanges” and “cryptocurrency” which is more commonplace in ordinary discourse.
Read on for a deeper discussion of these new provisions.
The information reporting provisions in the Infrastructure Act seek to address what U.S. governmental reports indicate is the underreporting of taxable income involving transactions in digital assets. Many believe this underreporting arose from a combination of factors, including
- Uncertainty by exchanges in how previous information reporting provisions applied to transactions involving digital assets, and
- The habit and custom of many U.S. taxpayers of relying on third-party information reporting (e.g., Form 1099) for summarizing their investment income. A Government Accounting Office study references IRS statistics that indicate taxpayer compliance is above 95% when there is third party information reporting, but below 50% when there is not.
In designing information reporting for digital assets, Congress built on the existing tax information reporting framework for the trading and transfer of traditional financial assets. In doing, so Congress added to the definition of “broker” to determine which businesses have information reporting requirements arising from functioning as cryptocurrency exchanges.
1. Requirement to Report Sales & Exchanges of Digital Assets
The first tax information reporting provision for digital assets under the Infrastructure Act provides the “clarification” that brokers with reporting obligations include “any person who [is paid and…] responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The information that brokers have to report will include the taxpayer’s name, address, tax identification number, gross proceeds from the sale or exchange of the digital asset, and other information the IRS identifies.
When the provision was being discussed, many were concerned that taxpayers engaged in mining, staking, and other consensus mechanisms supporting digital assets would be treated as brokers with information reporting obligations. However, statements (colloquies) on the floor of the U.S. Senate by Senators Portman (R-OH) and Warner (D-VA) indicated that the language was not intended to impose information reporting obligations on people or businesses whose sole (relevant) activity was to support consensus mechanisms. Similarly, the Senators stated that the new provision was not intended to impose information reporting obligations on persons or businesses solely engaged in the business of selling hardware or software that allows people to access their private keys.
The Treasury Department and the IRS will most likely propose rules in the coming months that describe how brokers are to comply with the new provisions. Treasury and the IRS may also address the issue of the types of decentralized applications (“dApps”) or exchanges that are treated as brokers with information reporting obligations. Some of the statements in the most recent Financial Action Task Force (FATF) Report on virtual assets may provide some insights into this DeFi reporting issue, particularly given the contributions of U.S. Treasury Department personnel in drafting the FATF Report:
- A person that only creates or sells a software application or a digital asset platform (i.e., a software developer) should not be considered Virtual Asset Service Providers (“VASPs”) – which includes brokers – if these are their only activities;
- The result would change, however, where the person uses the application or platform to to function as an exchange that executes transactions on behalf of others. This would also be the case where a person writes software or creates a platform so they can provide broker services to others where they retain control or sufficient influence over the assets, software, protocol, or platform, as well as any ongoing business relationship with users of the software (including when exercised through a smart contract); and
- Persons who merely hold governance tokens of a decentralized exchange should not be considered VASPs.
2. Basis Reporting & Holding Period Reporting Requirement
Brokers will be required to report basis and holding period information for digital assets acquired after January 1, 2023 that are sold or exchanged. This will be possible for digital assets acquired and sold on the broker’s exchange in taxable transactions, but brokers may not know the tax basis of assets transferred to the exchange by a taxpayer, notwithstanding another provision in the Infrastructure Act (discussed below) which requires brokers to inform each other of the tax basis of assets transferred between them. This is because an asset sold on an exchange may have been acquired on a foreign exchange, or a type of decentralized exchange that is not subject to the U.S. tax information reporting rules.
Practically, taxpayers will have to choose an accounting method for determining which assets are sold at or before the time of the sale, as is done for traditional financial assets held in brokerage accounts. This will be a new type of functionality for many digital asset brokers.
3. Requirement to Report Transfers to other Brokers
Under current law, a broker that transfers traditional financial assets to another broker is required to inform the receiving broker of the tax basis of the transferred assets. The application of this rule is tied to the statute that requires basis and holding period reporting for assets, and which was amended by the Infrastructure Act to apply to digital assets. The result of this amendment is to trigger a requirement for brokers subject to the U.S. tax information reporting requirements to transfer tax basis information on digital assets transferred between them. The application of this rule can be nuanced when it involves transfers to foreign brokers.
4. Requirement to Report Transfers where the Recipient Address does not Belong to a Broker
Unlike the vast majority of traditional financial assets, many digital assets are held in private wallets after their acquisition on exchanges. Recognizing this, the Infrastructure Act requires brokers to report any transfer of a digital asset to a wallet address that is not known to be that of a broker. This provision, coupled with the other information reporting provisions, will help put the IRS on equal footing with taxpayers in knowing the digital asset holdings that may be relevant to taxable income determinations and taxpayer reporting obligations.
5. Reporting for Transactions involving more than $10,000 in Digital Assets
Under existing law, any business that receives more than $10,000 in cash in one or more related transactions must report the transaction and certain personal information of the persons involved in the transaction. Coordination rules exist where the transaction would also be subject to other reporting rules, such as those applicable to financial institutions.
The Infrastructure Act applies this provision to transactions involving digital assets. Because this provision applies to brokers, retailers which accept digital assets as payment, and potentially other businesses, Treasury and the IRS may issue rules to minimize the quantum of duplicative reporting. 
Taxpayers and brokers transacting in digital assets may have a number of different reactions to the new tax information reporting provisions. For example, most taxpayers do not complain of information reporting for traditional financial assets done by brokers, and in fact welcome it as a feature that simplifies tax compliance. These taxpayers may find that the Infrastructure Act’s application of these existing reporting rules (with some modifications for certain unique aspects of the digital asset ecosystem) bring welcome reprieve from the challenges of computing their own taxable income from the differing ways they may earn income from transacting in digital assets. Other taxpayers may object to information reporting on privacy grounds.
Concerning brokers who will be responsible for the actual reporting, few may welcome increased regulatory reporting. However, if more reporting leads to:
- Better user experiences,
- Less headaches for taxpayers seeking to comply with their tax obligations,
- Fewer summonses from tax authorities, and
- Greater receptivity of digital asset trading activity by government regulators,
Brokers may experience better relationships with regulators, save costs, and earn more trading fees from increased activity. This latter point aligns with a trend among a number of exchanges in the United States to aid in taxable income calculations of their customers — both by producing better transaction and income reports for customers, as well as by referring users to or integrating with software companies that have tax compliance solutions for digital assets.
Regardless of reaction by these stakeholders, brokers will have until January 1, 2023 to determine how to comply for transactions occurring in 2023.  This will present different challenges, including most likely having to design reporting solutions before final regulations and forms are released.  Opportunities will also be present, however, as exchanges may be able to find synergies between their different compliance solutions used for various types of regulatory reporting.
Finally, other countries may take heed of the reporting framework contained in the Infrastructure Act and follow suit. These efforts may be aligned with the framework that the Organization for Economic Cooperation and Development (OECD) is said to be creating under which a country will require brokers under its jurisdiction to report on nonresidents who use those broker services. The countries would then send the digital asset trading data to the countries where taxpayers are tax resident. Effectively, this would apply the existing Common Reporting Standard principles to digital assets and align with one of the tax proposals in the Biden Administration “Green Book” published earlier this year.
 It is interesting to note that by adopting this new definition, Congress avoided the classification issue that many struggle with as to whether cryptocurrency is considered a commodity, security, intangible, or another type of asset which can trigger the application of different substantive tax rules.
Separately, Congress’ “digital asset” definition varies from the definition of “virtual asset” used by the Financial Action Task Force (“FATF”). See page 109 of this report:
“A virtual asset is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.” ,
These differences have the potential to create classification issues as it relates to different countries’ tax regimes, as well as issues in how tax and non-tax regulatory regimes overlap.
 Another bill is pending in the House of Representatives, the Build Back Better Act (“BBB Act”), contains two other provisions that would apply to digital assets if the BBB Act becomes law:
- Deferral of certain losses (under the Wash Sale Rules) on digital assets sold after January 1, 2022, where substantially identical digital assets were acquired 30 days before or after the date of sale.
- Treatment of appreciated digital assets (under the Constructive Sale Rules) as if they were sold where the taxpayer enters into a hedge with respect to the assets that reduces the potential for gain or loss on the contract. Examples include short sales, futures, and forwards to deliver the same or substantially identical digital asset. This rule would apply to contracts entered into after the legislation is enacted.
As of the date of this article, the BBB Act has not passed Congress.
 Reporting for transfers of more than $10,000 in digital assets under 26 U.S.C. 6050I will need to be reported within 15 days of the transaction, rather than only in 2024 for taxable sales and exchanges of digital assets. This is also the case for inter-broker transfers.
 For example, brokers subject to the new rules will have to provide new functionality that permits taxpayers to adopt an accounting method (e.g., LIFO, FIFO, HIFO) in determining which digital assets are sold, transferred to other brokers, or withdrawn and transferred to a wallet address that is not known to belong to another broker.