Key takeaways
- The proposed regulations (as defined below) follow the statutory definition of a digital asset under the Internal Revenue Code, but provide that non-fungible tokens (NFTs) and stablecoins also constitute digital assets.
- The definition of a broker is extremely broad and includes people who act as “intermediaries” of digital assets. It is not surprising that the definition of intermediary will not be well received by the digital asset community, as it will impose significant costs and reporting obligations on those with control or influence over an asset platform digital.
- The broad definition of a broker also includes individuals who act as payment processors with respect to digital assets. This definition should also capture parties who may not have anticipated having to comply with broker-dealer reporting rules.
The Internal Revenue Service (IRS) and the Department of the Treasury released a 282-page Notice of Proposed Rulemaking Concerning Digital Assets and Broker-dealer Reporting (the Proposed Regulations) on August 26, nearly two years after enactment of the law on investment in infrastructure and employment. which expanded broker reporting rules to include digital asset brokers.(1) The digital asset broker reporting rules were originally scheduled to take effect on January 1, 2024, but the IRS announced on December 23, 2022 that digital asset brokers would not be required to report digital asset transactions until ‘until the regulations implementing the provisions are finalized.(2) The Proposed Regulations require broker-dealers to (i) report the gross proceeds of sales of digital assets occurring on or after January 1, 2025, and (ii) report the adjusted basis and nature of any gain or loss from the sale of digital assets. digital assets occurring on or after January 1, 2025. Below is a brief discussion of some of the key aspects of the proposed regulations.
Definition of Digital Assets – Clarifications
The proposed regulations define a “digital asset” to mean “any digital representation of value recorded on a distributed ledger secured by cryptography (or any similar technology), without regard to whether each individual transaction involving such digital asset is actually recorded in this great book. , and it’s not cash.(3) The proposed regulations thus follow the statutory definition of a digital asset, but the preamble clarifies that NFTs and stablecoins are considered digital assets for purposes of the broker-dealer reporting rules.(4) The proposed regulations further clarify that classification of a digital asset as a security or commodity for purposes of the Securities and Exchange Commission or the Commodity Futures Trading Commission does not require that the digital asset also be a security or a commodity for federal tax purposes. Additionally, the proposed regulations provide that nothing in the proposed regulations may be cited as authority as to whether or not a digital asset is a security or commodity for any other purpose of the Internal Revenue Code (the Code).(5) The preamble also curiously states that the IRS is not aware of any digital asset options that could be considered a 1256 contract.(6)
Definition of digital asset broker
While the IRS retains the definition of a “broker” in existing Treas. Reg. § 1.6045-1(a)(1) as a person willing to “make” sales made by others, the proposed regulations amend the definition of “effect” to include any person who provides services facilitating the sale of digital assets and who would normally know, or be able to know the identity of the author of the sale and the nature of the transaction potentially giving rise to the gross proceeds of the sale. The draft regulations designate this person as a “digital asset intermediary”.(7)
A digital asset intermediary is able to know the identity of the party engaging in the sale if that person maintains sufficient control or influence over the facilitating services, including having the ability to set or change the terms of its service, including the fees it charges. bill users of its platform and ask the seller to provide their name, address and tax identification number.(8) A “facilitation service” includes any service that directly or indirectly completes a sale of digital assets, for example by providing (i) a party to the sale with access to a self-executing contract or protocol, (ii) a access to digital asset trading platforms. , (iii) automated market maker systems, (iv) order matching services, (v) market making functions, (vi) services to discover buy and sell prices the most competitive, or (vii) deposit or deposit-like services to secure both the parties to an exchange transaction in accordance with their obligations.(9)
Facilitation services therefore now encompass not only centralized (custody) service providers that act as legal agents of clients in the execution of trading activities, but also decentralized (non-custodial) financial trading platforms which rely on self-executing smart contracts without operator intervention.
The Proposed Regulations expand the definition of “broker” to include “digital asset payment processors” that facilitate digital asset payments in the ordinary course of their business by (i) receiving digital assets from a party and exchanging them for different digital assets or paid cash. in the second part; (ii) act as a third-party settlement organization that facilitates payments, either by making or submitting instructions to make payments, using one or more digital assets for the settlement of a reportable payment transaction; or (iii) acting as a payment card issuer that facilitates payments, either by making or instructing to make payments, in one or more digital assets, to a merchant acquiring entity in the as part of a transaction associated with a payment made by the acquiring merchant in settlement of a reportable payment transaction.(ten) It is important to note that a merchant that accepts digital assets directly from a customer as payment for their goods or services is not treated as a broker-dealer under the proposed regulations.(11)
American digital asset brokers
The IRS specifically delimits the applicability of the proposed regulations to a “U.S. digital asset broker-dealer,” which includes a U.S. person, a foreign branch of a U.S. person, a U.S. branch of a foreign entity that is treated as a U.S. person for certain purposes of the Code, a foreign partnership with controlling U.S. partners and a U.S. trade or business, and a foreign person who has 50 percent or more of his or her gross income effectively connected with a U.S. trade or business American company.(12) The proposed regulations require a U.S. digital asset broker-dealer to report information regarding sales made for its clients via an information return (on the new Form 1099-DA, which is expected to be issued in 2024) stating the name, customer’s address and taxpayer identification number; the name or type of digital assets sold; and the number of units sold, the date and time of the sale, and the gross proceeds of the sale. To help the IRS verify reported gross proceeds, broker-dealers would also be required to report the transaction ID or hash associated with the sale, the address of the digital asset from which the asset was transferred and if the consideration received was cash, a different digital asset. , other goods or services.
Non-US digital asset brokers
Non-US digital asset brokers are subject to different rules, with limited exceptions, that allow them to not report transactions. The key to determining whether a non-U.S. digital asset broker is subject to the broker-dealer reporting requirement is whether it is engaged in money services business (MSB) activities.(13) Generally, a non-U.S. digital asset broker-dealer that does not conduct business as an MSB is treated as making sales from an office outside the United States and therefore would not be considered a broker required to report under the draft regulation. unless it obtains documents indicating that a client has ties to the United States or is a U.S. person.(14) If, however, the non-US digital asset broker is an MSB, it must determine the place of sale of the digital assets and the foreign status of its clients.(15) As an MSB, a non-U.S. digital asset broker-dealer is required to report information regarding sales made for its customers, unless the broker-dealer can treat the customer as an exempt recipient under the broker-dealer reporting rules .
Due to the comprehensive nature of the proposed Regulations, digital asset platforms, whether centralized or decentralized, as well as payment processors must determine whether they meet the definition of a “broker” and, if this is the case, thinking about how to implement controls and policies. to collect appropriate information from customers Before they are required to report to the IRS.
Written comments on the proposed regulations must be provided by October 30, and a public hearing is scheduled for November 7.
(1) REG-122793-19.
(2) IRS Announcement 2023-2, December 23, 2022.
(3) Prop. Reg. § 1.6045-1(a)(19)(i).
(4) 88 Fed. Reg. 59,576 (August 29, 2023), to 59,582.
(5) Prop. Reg. § 1.6045-1(a)(19)(ii).
(6) 88 Fed. Reg. at 59,584. LedgerX has taken the position that certain options contracts constitute 1,256 contracts and are reported as such by LedgerX. See https://support.ledgerx.com/hc/en-us/articles/1500004683822-Documents-Tax-Information.
(7) Prop. Reg. § 1.6045-1(a)(21).
(8) Prop. Reg. § 1.6045-1(a)(21)(ii).
(9) Prop. Reg. § 1.6045-1(a)(21)(iii)(A).
(ten) Prop. Reg. § 1.6045-1(a)(22)(i).
(11) Prop. Reg. § 1.6045-1(b)(2)(viii).
(12) Prop. Reg. § 1.6045-1(g)(4)(i)(A); Treasures. Reg. § 1.6049-5(c)(5).
(13) Prop. Reg. §§ 1.6045-1(g)(4)(i)(D) and 1.6045-1(g)(4)(iv).
(14) Prop. Reg. § 1.6045-1(g)(4)(iv).
(15) Prop. Reg. § 1.6045-1(g)(4)(v).
(View source.)
