Welcome to the first edition of Chain Reaction. Our team is actively monitoring for developments in the cryptoassets industry. We closely track legislative and regulatory changes, summarizing important tax considerations and implications you need to know for your business.
New proposed legislation adds information reporting requirements for digital assets
The proposed Infrastructure Investment and Jobs Act would explicitly impose information reporting on cryptocurrency transfers in the same way information reporting is required on transfers of stock or securities. Therefore, both sales price and “basis” – typically original acquisition price – would be reported to the IRS, which would inform the IRS of a taxpayer’s sale of cryptocurrency, and allow the IRS to ascertain gain associated with the sale of a unit of cryptocurrency. These items are already required to be independently reported by a taxpayer on a tax return. Notably, the proposed legislation expressly states that no inference should be taken with respect to whether existing law already requires this type of information reporting. The proposed legislation does not have any clear jurisdictional limitation, however, existing regulations (if they continue to apply) may limit the application to US organized or US controlled entities. Therefore, it is unclear whether there is a basis for the United States to compel non-US brokers to provide this type of information to the IRS. In order to subject cryptocurrency to the same reporting rules as stock and securities, the proposed legislation expands the definition of “broker” – a term used in existing information reporting laws to identify the person required to undertake reporting – to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” In principle, the amended definition should capture any cryptocurrency exchange and certain entities that otherwise facilitate cryptocurrency sales or transfers. Some in the cryptocurrency industry have expressed concern over the breadth of the amended definition, which does not explicitly exclude miners, software developers, stakers and other individuals who don’t have customers. An amendment has been proposed to eliminate the concern. Under the proposed legislation, cryptocurrency “brokers” would now be obligated to collect certain information (name, address and US tax identification number) about the owners of cryptocurrency accounts. They would also be obligated to provide certain information to the IRS regarding a client’s sale of cryptocurrency, including identifying information about the seller and the amount recognized from the sale. The proposed legislation also modifies the so-called “basis reporting” statute to require brokers provide information to the IRS regarding the price at which a particular unit of cryptocurrency was acquired by a client (subject to certain specified adjustments) and to provide this information to other brokers if a client were to transfer his cryptocurrency to another digital wallet or exchange. This proposed legislation, if enacted into law, would have an effective date of January 1, 2023.
IRS confirms pre-2018 exchanges of different cryptocurrencies fail to qualify as Section 1031 like-kind exchanges
In CCA 2021-24-008, released on June 18, 2021, the Service confirmed that exchanges of neither Bitcoin or Ether for Litecoin nor Bitcoin for Ether prior to January 1, 2018, qualify as like-kind exchanges under Section 1031. To make this determination, the Service relied on the regulatory requirement under Treas. Reg. §1.1031(a)-1(b) that “like-kind” refers to the nature or character of property and not the grade or quality, as well as two revenue rulings which found exchanges of gold bullion for silver bullion and an exchange of one gold coin for another failed to qualify as “like-kind” exchanges because of the former’s different use, i.e., silver was generally an industrial commodity while gold an investment, and the latter’s different character, i.e., one gold coin was valued due to its collectability while the other was derived from its metal content.
For these reasons, the Service found that because in 2016 and 2017 Bitcoin and Ether played a fundamentally different role from other cryptocurrencies in the broader cryptocurrency marketplace, acting as an “on and off ramp for investments and transactions with other cryptocurrencies,” Bitcoin and Ether were different in both nature and character from Litecoin. Consequently, neither a pre-2018 exchange of Bitcoin for Litcoin or Ether for Litecoin qualified as a like-kind exchange under Section 1031. Additionally, while Bitcoin and Ether shared similarities as compared to Litecoin and other cryptocurrencies, they were also fundamentally different in their own regard as well. Bitcoin was designed to act as a unit of payment on the Bitcoin network, while Ether was designed to not only act as a unit of payment but also “fuel” for operating smart contracts and other applications. This additional functionality differentiated Ether in nature and character from Bitcoin, and, therefore, the Service found Bitcoin and Ether do not qualify as like-kind property under Section 1031 either.
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