Implementation of reporting rules for brokers with respect to digital assets delayed, but regulations may be on the way

In Announcement 2023-2, the IRS and the Treasury Department effectively delayed the implementation of rules that would treat many cryptocurrency and digital asset market participants as brokers subject to burdensome information reporting and compliance rules.

While this delay is welcome, it may be short-lived, as a regulations package that would implement these rules is currently under review by the White House Office of Information and Regulatory Affairs (ORIA).

Background

The Infrastructure Investment and Jobs Act, signed into law by President Joe Biden in November 2021, expanded the existing reporting and compliance regime applicable to brokers by amending the definition of broker in Section 6045(c)(1)(D) to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

As a result, starting January 1, 2023, the Act requires “brokers” of digital assets to report information to the IRS. There has been widespread concern that the broad definition of "broker" would cover not only brokers as that term is traditionally understood, but also digital asset miners, stakers, and software developers.

Announcement

In the Announcement, Treasury and the IRS express their intention to implement the Act by publishing regulations specifically addressing the application of sections 6045 and 6045A to digital assets and providing forms and instructions for broker reporting.

Somewhat cryptically, the Announcement provides that, until final regulations are released, brokers of digital assets “may” report and furnish statements as required under current law, but that they will not be required to report or furnish additional information with respect to digital assets until the final regulations are issued. Digital asset market participants should consult their tax advisors regarding their obligations under current rules as well as what is likely to be expected of them under forthcoming regulations (for example, developing procedures for collecting customer and transaction information).

New regulations in the pipeline

Digital asset market participants may want to ramp up implementation of these new procedures since, according to ORIA’s website, as of January 12, 2023, proposed regulations that would implement the Act’s expanded reporting regime for digital assets have been sent to ORIA for review and consideration.

Find out more about the implications of this development by contacting the authors.