US Treasury signals helpful limitations on “broker” definition under new cryptocurrency reporting rules

The US Treasury Department recently sent a letter to six senators signaling a limitation on the definition of a “broker” to potentially exclude stakers, miners, and software providers in the blockchain and cryptocurrency space.

As previously discussed in our November issue, legislation adopted via the Infrastructure Investment and Jobs Act (HR 3684) included language meant to increase reporting obligations and tax collections from facilitators of digital asset transactions by greatly expanding the definition of a broker to include "any person who (for consideration) is responsible for providing any service effectuating transfers of digital assets on behalf of another person." This expansive definition would have likely caused virtual currency miners, software developers, stakers, and other entities who do not actually facilitate transactions to be subject to the broker reporting rules.

While the law was passed, opponents of the law signaled that there may be further changes to ring-fence the law to only include exchanges through which consumers buy, sell, and trade digital assets.

On February 11, Treasury Assistant Secretary for Legislative Affairs Jonathan Davidson sent a letter^[1]  to a group of six senators – Cynthia Lummis (R-WY), Mark R. Warner (D-VA), Rob Portman (R-OH), Kyrsten Sinema (D-AZ), Pat Toomey (R-PA) and Mike Crapo R-ID)^[2]  – stating that “the department’s view is that ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by the reporting requirements for brokers." This language seems to suggest that, contrary to the original guidance, "ancillary parties" such as miners, stakers, and software developers will likely not be subject to the broker reporting rules. The letter also stated that Treasury intends to issue proposed regulations further clarifying the broker definition for these purposes.

While this letter is far from formal guidance and will likely see further refinement, including “the extent to which other parties in the digital asset market, such as centralized exchanges and those often described as decentralized exchanges and peer-to-peer exchanges, should be treated as brokers,” it provides some relief to industry leaders and taxpayers who may have been inadvertently been subject to the broker rules.