US Infrastructure Law: Key Impacts on the Digital Asset Industry | Latham & Watkins LLP


Industry will have two years to learn the new requirements and develop systems to ensure compliance.

On November 15, 2021, President Biden signed the Law on investment in infrastructure and employment in the law (the Law). Two provisions of the law could have a significant impact on the digital asset industry: (i) the law includes a broad definition of “digital asset” and (ii) the law redefines “broker” to include certain persons providing services. services to transfer digital assets.

For months, the digital asset industry and its allies rallied around these provisions on the grounds that they were impractical and would impose onerous reporting burdens, hamper innovation (especially in the face of international competition) and threaten privacy rights. These provisions having the force of law, their effects deserve to be pointed out.

Defined digital asset

For the purposes of the Act, “digital asset” is defined as “any digital representation of value that is recorded on a cryptographically secure distributed ledger or any similar technology as specified by the Secretary [of the Treasury]. “The definition is broad and appears to encompass a variety of digital assets.

Extended definition of broker

The law changes the definition of “broker” in the Internal Revenue Code to include “any person who (for a fee) is responsible for regularly providing any service that transfers digital assets on behalf of another person.” The ramification of the expanded definition is that any party considered to be a “broker” will be required to report to the IRS on Form 1099-B the gross proceeds (in US dollars) of sales or transfers of digital assets by their clients. , as well as the names and addresses of customers.

These exchanges will be required to record and, in some cases, report to the IRS the base cost of customers’ digital assets. But given that “any service that transfers” can be interpreted broadly, there is widespread concern that the burdens of collecting and reporting tax information could also apply to digital participants who have not. of real customers, do not negotiate transactions and cannot even collect the necessary information. for reports, such as validators, miners, and hardware / software developers.

How this requirement will apply to decentralized applications such as decentralized exchanges or loan protocols is an open question. Would launching a protocol that performs these services without any other intermediary be enough to be considered a broker? It remains to be seen.

Reports on ‘cash’ transactions over $ 10,000 extended to digital

Another provision of the law extends Section 6050I of the Internal Revenue Code to include digital assets. Section 6050I requires taxpayers who, in the course of their trade or business, receive more than US $ 10,000 in cash and cash equivalents – in a single transaction or in a series of related transactions – to collect, verify and report Personally identifiable information of a payer (such as name and SSN) to the IRS within 15 days. The penalty for non-compliance includes fines and felony charges punishable by up to five years in prison.

By law, the transfer of digital assets over $ 10,000 will be treated as cash. The law will apply to all taxpayers other than financial institutions – individuals, businesses, custodians, and exchanges – who receive any type of digital asset above the $ 10,000 threshold in the course of a business or trade activity. This reporting requirement conspicuously includes sales, loans and barter (whether on centralized or decentralized exchanges, or peer-to-peer) of digital assets such as cryptocurrencies, digital tokens and NFTs.

Start of reporting after December 31, 2023

The digital asset provisions of the Act are not immediately applicable. Instead, they will apply to tax returns due and returns due after December 31, 2023. The digital asset industry will need to spend the next two years learning the new requirements and developing systems to ensure conformity.

According to the Joint Commission on Taxation, the provisions of the law on digital assets are projected generate nearly US $ 28 billion over the next 10 years. There have been few public attempts to estimate the projected cost of compliance these provisions will impose on digital market participants, including Main Street, which is increasingly involved in the digital asset space.

In the meantime, efforts have already been made to amend or repeal certain aspects of the law. A proposal would exempt blockchain validators (i.e. miners), non-custodian hardware or software vendors, and protocol developers from the definition of “broker” (and therefore from the reporting requirements on brokers). Another proposal would clarify the definition of “broker” to include “any person who (for a fee) is prepared, in the ordinary course of a business or commercial activity, to make sales of digital assets at the request of his clients”. It remains to be seen whether significant efforts will be made to reduce the application of the cash reporting requirement to digital assets.

In the absence of any amendment to the law, the Treasury Department will need to clarify who is subject to the digital asset provisions and provide prompt advice to stakeholders to allow them sufficient time to implement the law over the two years. coming years.

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