Recent correspondence between a group of U.S. senators and the Treasury Department appears to have allayed significant concerns expressed by the digital asset industry regarding the scope of new broker reporting legislation included in the recently passed Investment and Infrastructure Employment (IIJA). The IIJA amended Sections 6045 and 6045A of the Internal Revenue Code, which impose information reporting requirements on brokers and certain other persons who facilitate transactions involving “covered securities.”
These amendments expand the definition of covered securities to include “digital assets” and the definition of broker to include “[a]any person who (for compensation) is engaged to regularly provide any service effecting transfers of digital assets on behalf of another person.”1 For these purposes, “digital assets” are defined as “[a]any digital representation of value that is recorded on a distributed ledger secured by cryptography or similar technology specified by the Secretary, “2 which would include digital asset securities (as that term was used by SEC staff) as well as any cryptocurrency, utility tokens, and non-fungible tokens (NFTs), among other digital assets.
As amended by the IIJA, the Internal Revenue Code now generally requires anyone who regularly facilitates transfers of digital assets to provide basic information about each transaction, including the name and address of the parties and details regarding the gross proceeds of the transaction. This requirement currently applies whether the digital asset is actually transferred or under the control of the person(s) acting as brokers within the meaning of the new definition.
Unsurprisingly, the scale of the new reporting requirement alarmed the relatively nascent digital asset industry. This alarm was not without reason. To see the potential scope of the new legislation, consider the following example:
Person X, using the cryptocurrency ETH (the native token of the Ethereum blockchain), buys on OpenSea.io an NFT created by person Y. Person X transfers the ETH to OpenSea.io from his digital wallet, powered by MetaMask software. Person X and Person Y only interface directly with OpenSea; however, the transaction involves several other intermediaries: the community that runs and maintains the Ethereum protocol, the miner that validates the transaction and has it stored on the Ethereum blockchain, and the creator of the digital wallet software, MetaMask, which stores the private keys controlling Person X’s ETH. Additionally, several of these parties receive transaction fees to facilitate the transaction.
The new Section 6045 at first glance could bring the community that maintains the Ethereum protocol, miner, and digital wallet software provider into the definition of “broker,” potentially subjecting each of these parties to information reporting requirements. The problem is that the nature of the functions provided by several of these parties generally does not allow them to obtain the information required to be reported by section 6045. Although some of these parties interact directly with Person X or Person Y , others – for example, the miner and the community maintaining the protocol – do not interact with any of the people.
Recognizing these concerns, the senses. Patrick J. Toomey (R-Pa.), Ron Wyden (D-Ore.) and Cynthia M. Lummis (R-Wyo.) proposed an amendment to the IIJA before its passage that would have excluded minors, sellers of hot and cold wallets and blockchain protocol developers of the definition of “broker”. However, this amendment was ultimately rejected.
Correspondence between the Senate and the Treasury
On December 14, 2021, a group of U.S. Senators sent a joint letter to Treasury Secretary Janet Yellen urging the Treasury to provide informal assurance (and, possibly, formal regulatory guidance) that the IIJA amendments to Sections 6045 and 6045A would be interpreted to prevent the undesirable result described above. Recently, on February 11, 2022, the Treasury responded with its own letter, stating that “auxiliary parties who cannot access information useful to the IRS are not intended to be covered by broker reporting requirements.” As an example of an ancillary party not covered by the IIJA amendments, the Treasury proposed “people who only validate transactions” (i.e. miners) and “people who simply write code software” (for example, MetaMask). These informal guidance may dispel some of the uncertainty generated in the digital asset industry by the IIJA.
Additionally, the Treasury letter confirmed that it will “examine the extent to which other parts of the digital asset market, such as centralized exchanges and those often described as decentralized exchanges and peer-to-peer exchanges” (per example, OpenSea) should “be treated as brokers” for the purposes of 6045 and 6045A. The Treasury pointed to existing regulations in Section 6045 that impose broker reporting obligations on “market participants” whose activities grant “l ‘access to information about securities sales by taxpayers’ as opposed to participants such as miners or software vendors who do not have such access.
Interestingly, in support of the position set out in its letter, the Treasury referred to a “symposium” between the senses. Rob Portman (R-Ohio) and Mark Warner (D-Va.) Led to the Senate in August 2021, when the IIJA was still under consideration. A colloquy is a scripted conversation between members of Congress that is recorded in the Congressional record and is part of the legislative history of a bill. Colloquia can serve to provide context when the black letter of a bill is open to wide interpretation.3 A symposium can provide a compelling indication of the legislative intent of a bill, which regulators can rely on when enacting guidance.4
Notwithstanding this informal advice and insight into the intent of lawmakers, the digital asset industry continues to push for a formal amendment or regulation clarifying the narrower definition of digital asset broker in Section 6045 to clear up any confusion. and better prepare for future regulatory directions. about the booming digital asset industry.
1 Section 6045(c)(1)(D).
2 Section 6045(g)(3)(D).
3 The IIJA was passed pursuant to the Senate budget reconciliation rules, which can generally only be used to pass spending or revenue-raising laws. To avoid adding language to a bill that might prevent it from going through budget reconciliation, the Senate may express its intent for a bill at a symposium rather than in the actual wording of the bill. .
4 For example, Sens. Keating and Ervin participated in a colloquium in April 1964 to construct the legislative history concerning the Civil Rights Act of 1964. 88 Cong. Rec. S6717 (1964).
Due to the generality of this update, the information provided here may not be applicable in all situations and should not be applied without specific legal advice based on particular situations.
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