By: Krystell Fienco
In 2021 congress enacted the Infrastructure Investment and Jobs Act (“the Act”).[1] The Act included an addition to the definition of “broker” in 26 U.S.C.S. § 6045(c)(1) of the Internal Revenue Code of 1986.[2] Title 26 of the U.S. Code, otherwise known as the Internal Revenue Code (“IRC”), codifies all federal tax laws and is implemented by the Internal Revenue Service (“IRS”).[3] The[AG1] newly added definition, defines a “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”[4] Prior to this new definition, businesses “effectuating” transfers of digital assets on behalf of another person were not subject to the reporting requirement of 26 U.S.C.S. § 6045 and related penalties for failure to report.[5][AG2] Such broker reporting requirements under section 6045 include reporting the name, addresses, and phone numbers of each customer.[6] Depending on the reading of “digital assets,” entities that may not have been considered a broker before may now have to update their reporting systems or face penalties. Similarly, the interpretation of “effectuating,” if read broadly, could require reporting from miners and software providers that play a small but important role in digital asset transactions.[7] For example, miners are responsible for validating cryptocurrency transactions and maintaining the public ledger, which in turn facilitates cryptocurrency transactions and therefore could be interpreted to effectuate transfers under Section 6045.[8]
Brokers are additionally subject to 26 U.S.C.S. § 6050I if they engage in a trade or business that received more than the threshold value of $10,000 in “cash” transactions.[9] The Act broadens the definition of “cash” in the context of 26 U.S.C.S. § 6050I.[10] Section D of § 6050I now includes an additional definition to “cash,” defining it as “any digital asset (as defined in section 6045(g)(3)(D)).”[11] 26 U.S.C.S. § 6045(g)(3)(D)’s definition of a digital asset was also an addition of the Act. The Act defines digital assets in 26 U.S.C.S. § 6045 as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”[12] The expanded definition of “cash” and “digital asset” now requires regulatory compliance from any person engaged in a trade or business, that, in the course of such trade or business, receives more than $10,000 in digital assets such as cryptocurrency.[13] A transaction of more than $10,000 does not necessarily mean a single transaction, it also includes a group of related transactions that accumulate to reach the $10,000 threshold.[14] Reaching the threshold triggers the requirement to complete of IRS Form 8300.[15] The purported effective date of such changes on the Act was January 1, 2024.[16]
Reasonably, persons, as defined by 26 U.S.C. § 7701, engaged in a trade or business that are now potentially subject to the new reporting requirements are concerned with the possibility of being subject to enforcement actions and penalties for failure to report.[17] Part of the fear is due to the broad definitions that could attributed to digital assets, especially given the part where a digital assets are defined as “any similar technology as specified by the Secretary.”[18] Additionally, digital assets are often transferred in an anonymous nature, giving rise to privacy concerns in reporting every transaction or related group of transactions that meet the $10,000 threshold. In response to criticism for lack of proper guidance and rules, the IRS issued a statement on January 16, 2024.[19] The IRS’s statement concluded that taxpayers engaged in a trade or business required to report transactions, or groups of transactions, of digital assets of more than $10,000, do not have to report the receipt of digital assets until the U.S. Treasury Department and the IRS issue formal regulations.[20] In essence, despite the effective date in the language of the Act, the IRS is advising taxpayers to delay their reporting requirement until they can figure things out on their end.
Critics of the reporting requirement have shared their belief that filling out Form 8300, as required by 26 U.S.C.S. § 6050I, essentially strips cryptocurrency from the privacy it is intended to have.[21] For context, Satoshi Nakamoto, the pseudonym name of the creator of Bitcoin, wanted Bitcoin to be an anonymous, decentralized, electronic cash system that relies on the well-built foundation of the peer-to-peer network.[22] Anonymity is a fundamental part of Satoshi’s vision because it provides the privacy offered by traditional baking methods despite removing banks and other third party interference from the picture.[23] The anonymity provided was not “absolute,” as the Bitcoin system is tied to a public ledger where everyone can see each other’s public keys (think of them as usernames).[24] The public keys belong to one person, but, unless the public key is yours, you would not know whoit belongs to.[25] Satoshi pushed forth the idea of an individual having multiple public keys for different transactions (unless they are related) in order to avoid the public from keeping track of all the transactions tied to the same public key.[26]
The privacy concern surrounding the expansion of 26 U.S.C.S. § 6050I was the root of legal action in Kentucky.[27] Plaintiffs compared the reporting requirement to “general warrants and writs of assistance of the colonial era,” in violation of the First and Fifth Amendment.[28] Although the case was dismissed in the United States District Court for the Eastern District of Kentucky, due to lack of jurisdiction given the Treasury Department’s pending regulations on how to comply with the mandate, it forces us to question whether or not the regulation is truly good for society.[29]
A $10,000 threshold is relatively low for any person engaged in a trade or business. Part of the concern is that the IRS will be monitoring transactions too closely, especially since the threshold can be met through a group of related transactions.[30] The transactions monitored will not only be of corporations but also of normal Americans who, for example, may get paid for their services through cryptocurrency or other forms of digital assets such as NTFs.[31] It will require a lot of additional expenses in order to monitor every digital asset transaction in order to calculate which transactions are related and when the related transactions reach the threshold amount. Complications are likely to arise because related transactions may include anything from a lunch to a coffee, as long as such transaction stems from a payment received in the form of digital asset.
While an increase in reporting requirements is not ideal to those allured to cryptocurrency by its anonymity, there is validity in the government’s concern regarding money laundering and it’s part in the government’s justification for such intrusion.[32] Parties involved in cryptocurrency are no stranger to the Anti-Money Laundering Program requirements already in place by the Financial Crimes Enforcement Network (“FINCEN”).[33] The difference is that FINCEN’s Anti-Money Laundering Program focuses on internal policies, controls, and procedures to be implemented by the broker-dealers themselves.[34] On the other hand, IRS Form 8300, requires persons, both who send the cash and who received the cash, to report sensitive information such as their full address and social security numbers or taxpayer identification number.[35] Such exposure is enough to make the person who is sending money want to choose an alternative payment route, especially since Form 8300 would require them to not only submit their own information but request information from the beneficiary.[36] The sensitive information required goes against a core principle of Satoshi’s vision for Bitcoin, the first decentralized cryptocurrency.[37]
While the reporting requirement may seem minimal and in good faith, it may lead to a snowball effect stemming from those investing a ton of money into digital assets down to the normal American investor. As mentioned before, if “miners” are included under the new definition of “brokers” then companies and capable individuals will be less inclined to “mine,” thereby slowing the growth of cryptocurrencies.[38] If big investors lose interest in cryptocurrency the development and growth that is yet to be seen will likely cease to exist. Since Satoshi’s Bitcoin creation, cryptocurrency has become a household term.[39] In fact, cryptocurrency is deemed to be the most common type of investment by Gen Z’s.[40] A 2023 study by the Pew Research Center shows that 41% of men and 16% of women ages 18 through 29 have invested in, traded, or used cryptocurrency.[41] FINRA’s Investor Education Foundation released a report finding that Gen-Z (ages 18-25) and Millennial (ages 26-41) investors are primarily investing in cryptocurrency rather than stocks or mutual funds.[42] We can already see the big impact cryptocurrency has had on the financial habits of young adults, particularly through social media applications given all the videos on “cryptocurrency investments tips” and “how cryptocurrency can be an alternative to a retirement plan.”[43] Cryptocurrency is also deemed to be a more accessible way to invest for younger generations.[44] Since you do not need to buy a whole coin, investors can accumulate cryptocurrency at their own pace and when they want.[45] Such investments are further facilitated by phone apps such as Robinhood, Coinbase, Binance, and eToro. Bitcoin can even be earned through online video games.[46]
Overall, expansive interpretations to the terms “broker,” “effectuating,” and “digital assets,” as defined by the Infrastructure Investment and Jobs act, can stunt the growth of digital assets and cryptocurrency. Such broad readings would be a disservice to the general public who would want to get involved in digital asset investments, either independently or through a broker, by creating additional barriers to enter the investment space. The more impositions set in place for digital asset investments the higher the risk of transforming this type of investment into a domain exclusive to the wealthy, as not everyone can afford an attorney or someone willing to help them understand how to invest while following the law. The average individual will find it easier to fund their retirement plan in a more tradition manner, such as through their employee provided 401(k) plans. While the Act directly affects only those engaged in a trade or business who are subject to the $10,000 threshold reporting requirements, the impact trickles down to investors themselves. Investors and businesses alike will likely reconsider their level of involvement with digital assets and cryptocurrency given that the original appeal of privacy is now overshadowed by the new reporting requirements with a very low threshold.
[1] Infrastructure Investment and Jobs Act, Pub. L. No. 135 Stat. 429, 117-58 (2021).
[2] Id.
[3] United States Census Bureau, History Title 26, U.S. Code, https://www.census.gov/history/www/reference/privacy_confidentiality/title_26_us_code_1.html.
[4] Id.
[5] 26 U.S.C. § 6045.
[6] 26 U.S.C. § 6045.
[7] Allyson Versprille, Crypto Firms Brace for New Rules Forcing Broad Reporting to IRS, BLOOMBERG NEWS, https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/BNA%200000017e3549d91ba77ff76bbb750001?bna_news_filter=bloomberg-law-news.
[8] 26 U.S.C. § 6045.
[9] 26 U.S.C. § 6050I.
[10] 26 U.S.C. § 6050I.
[11] 26 U.S.C. § 6045.
[12] 26 U.S.C. § 6045.
[13] 26 U.S.C. § 6050I.
[14] Id.
[15] IRS, Treasury and IRS Announce That Businesses Do Not Have to Report Certain Transactions Involving Digital Assets Until Regulations Are Issued (Jan. 16, 2024), https://www.irs.gov/newsroom/treasury-and-irs-announce-that-businesses-do-not-have-to-report-certain-transactions-involving-digital-assets-until-regulations-are-issued.
[16] John Woolley, Crypto Transaction Reporting Law Deserves Scrutiny, Appeal Says, BLOOMBERG NEWS, https://www.bloomberglaw.com/bloomberglawnews/white-collar-and-criminal-law/BNA%200000018d46c2d1eaa7fdeed375700000?bna_news_filter=white-collar-and-criminal-law.
[17] 26 U.S.C. § 7701.
[18] 26 U.S.C. § 6045.
[19] IRS, supra note 15.
[20] Id.
[21] Patrick Ambrosio, Congress’ Crypto Reporting Rules Draw Constitutional Challenge, BLOOMBERG NEWS, https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/XBQ0ICG8000000?#jcite.
[22] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN.ORG, https://bitcoin.org/bitcoin.pdf.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] See Carman v. Yellen, No. 5:22-149-KKC, 2023 U.S. Dist. LEXIS 124141 (E.D. Ky. July 19, 2023); Woolley, supra note 16; Ambrosio, supra note 21.
[28] Ambrosio, supra note 21.
[29] Woolley, supra note 16.
[30] Ambrosio, supra note 21. Laura Davison, How Taxing Crypto Got Changed by New U.S. Law: QuickTake, BLOOMBERG NEWS, https://www.bloomberglaw.com/product/blaw/bloombergterminalnews/bloomberg-terminal-news/R2OL3EDWRGG2.
[31] Id.
[32] Laura Davison, How Taxing Crypto Got Changed by New U.S. Law: QuickTake, BLOOMBERG NEWS, https://www.bloomberglaw.com/product/blaw/bloombergterminalnews/bloomberg-terminal-news/R2OL3EDWRGG2.
[33] Jason Foye, An Inside Look into FINRA’s Crypto Asset Work, FINRA, https://www.finra.org/media-center/blog/inside-look-finras-crypto-asset-work.
[34] SEC, Anti-Money Laundering (AML) Source Tool for Broker-Dealers, https://www.sec.gov/about/offices/ocie/amlsourcetool#:~:text=An%20AML%20program%20must%20be,of%20transactions%20under%2031%20U.S.C..
[35] IRS, Report of Cash Payments Over $10,000 Received In A Trade Or Business, https://www.irs.gov/pub/irs-pdf/f8300.pdf.
[36] Id.
[37] Nakamoto, supra note 22.
[38] Versprille, supra note 7.
[39] Greg Iacurci, Crypto Is Gen Z’s Most Common Investment. That May Be Risky, Experts Said, CNBC, https://www.cnbc.com/2023/06/07/crypto-is-gen-zs-most-common-investment-that-may-be-risky.html (88% of Americans have “heard a lot/a little about cryptocurrency.”)
[40] Id.
[41] Michelle Faverio and Olivia Sidoti, Majority of Americans Aren’t Confident in the Safety and Reliability of Cryptocurrency, PEW RESEARCH CENTER, https://www.pewresearch.org/short-reads/2023/04/10/majority-of-americans-arent-confident-in-the-safety-and-reliability-of-cryptocurrency/.
[42] CFA INSTITUTE, Gen Z and Investing: Social Media, Crypto, FOMO, and Family, FINRA INVESTOR EDUCATION FOUNDATION, https://www.finrafoundation.org/sites/finrafoundation/files/Gen-Z-and-Investing.pdf.
[43] Brianna Honkawa d’Estries, Gen Z Could Completely Change the Bitcoin Market. Here’s How, FORBES, https://www.forbes.com/sites/briannahonkawadestries/2023/07/10/gen-z-could-completely-change-the-bitcoin-market-heres-how/?sh=1975ea8f666d.
[44] Id.
[45] Id.
[46] Id.
