The newly signed bi-partisan Infrastructure Investment and Jobs Act (“IIJA”) includes new regulations aimed directly at cryptocurrency oversight. Unlike more traditional asset classes, cryptocurrencies are not governed by a single agency, nor are they overseen by a centralized, regulated exchange, with different regulators treating cryptocurrency in different ways. For example, the SEC applies the Howey principle to determine whether cryptocurrencies qualify as a regulated security; the Commodity Futures Trading Commission argues that cryptocurrency should be regulated like a commodity; the Internal Revenue Service taxes cryptocurrency like property; many in FinTech argue it is simply a form of payment. Accordingly, cryptocurrency regulation is an ever-evolving area, with multiple agencies trying to determine how to regulate this new asset class.
The IIJA starts the process of addressing this confusion and regulatory competition. Under the IIJA, the IRS will grow its regulatory power over cryptocurrencies by increasing the reporting requirements surrounding digital assets. The bill will require “brokers” to report transactions for cryptocurrencies and other digital assets to the IRS on a 1099 form. The expansive definition of the term “broker” may be controversial because a broker is any person who regularly provides a service that executes transfers of digital assets, like cryptocurrencies. Anyone acting as a broker will be required to report those transactions to the IRS in the same manner that securities brokers must do for stock and bond trades today. Industry advocates warn that such a broad definition will potentially implicate cryptocurrency miners, validators, and developers as brokers who must now report information to the IRS that they may not have access to. Additionally, the IIJA will require businesses to report digital-asset transactions of more than $10,000.
Opponents of these new regulations argue they could threaten the growing cryptocurrency market by enforcing reporting requirements and additional burdens on an unsuspecting and perhaps unintended group of individuals and entities that may not have familiarity with or the sophistication of entities traditionally required to report, such as SEC-regulated brokers. Indeed, these new reporting requirements potentially fall on participants in the market, and not just those performing traditional brokerage services.
The requirements in the infrastructure bill will not take effect until Jan. 1, 2023, with reporting needed in 2024. Accordingly, there is time for Congress to draft a narrower definition of broker (and address other regulatory needs in the market) but it is clear that anyone currently operating in the cryptocurrency field needs to evaluate these new rules and be prepared to comply with the new IRS reporting requirements.
This alert does not purport to be a substitute for advice of counsel on specific matters.
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