The United States Treasury has issued a proposed regulation requiring “brokers” to report proceeds from sales of digital assets. Reporting of real estate transactions where payment is made in cryptocurrency is also required.
Under Internal Revenue Code (Code) 6045, Treasury requires “brokers” to file information returns with regard to customer transactions involving certain assets. As part of the Infrastructure Investment and Jobs Act passed by Congress in 2021, the definition of broker was expanded to include “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This is the first time that the Code defined digital assets.
The goal of the new law and the proposed regulations is to treat crypto exchanges like stock brokerages and to make sure that taxpayers comply with their tax obligations, as now the transactions are to be reported directly to the IRS by crypto exchanges.
Many in the crypto industry believe that the proposed regulations are in fact good news as it indicates that the government accepts the fact that crypto is here to stay. Rather than fight crypto, the regulations are in essence an admission by the US Government that rather than seek to keep crypto illegal, the focus is now to accept crypto as a reality, and try to regulate it.
Who is a broker? The definition is broad and includes any person (US or foreign) who in the ordinary course of business takes part in the sales of digital assets to be made by others. This includes a crypto exchange, a barter exchange, any person who regularly acts as a middleman with respect to property or services, and any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Persons involved in real estate transactions where digital assets are used as consideration can also be treated as brokers.
What information must a broker report? Name, address, and taxpayer ID, as well as wallet addresses and blockchain transaction IDs. This of course has significant serious privacy implications, as financial histories can be reconstructed from blockchain records.
Under the proposed regulations, the definition of cryptocurreny is broad. Historically, crypto has been defined as “any digital representation of value that is recorded on a secured distributed ledger”. However, the current regulations go beyond that and include the sale of non-fungible tokens. On the other hand, stablecoins are generally excluded from the reporting rules as they are treated as cash themselves.
The proposed regulations define “sale” as any time a cypto asset is sold for cash, meaning US dollars or any convertible foreign currency that is issued by a government or a central bank, whether in physical or digital form.”
Real estate transactions
Under the Proposed Regulations, a broker includes a real estate broker. In case the buyer pays for real estate in digital assets, the real estate broker must report the transaction.
If approved, the regulations will go into effect in 2025.
To read the proposed regulation, see