02 Aug 2021 Simon Briggs
New Reporting Requirements And Penalties For Crypto Exchanges, According To Senate Infrastructure Bill
The U.S. Senate released its latest version of the bi-partisan infrastructure bill on August 1. In the 2,702-page document, the U.S. Senate is adding increased information reporting for cryptocurrency exchanges, or “brokers” of cryptocurrency transactions.
The ‘‘Infrastructure Investment and Jobs Act’’ also adds a penalty mechanism for exchanges or brokers, which don’t provide such information.
The pending Act, if passed, would not affect individuals holding or managing their crypto assets. Rather, the Act is concentrated at crypto exchanges and brokers, or “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”.
The crypto exchanges and OTC desks, falling under the Act, have to file an information return reporting the transaction.
However, a form about the reporting has not yet been created, as the law requiring it to be filed has not yet been passed.
The legislator update is scheduled for kicking in 2023, which gives exchanges enough time to get ready to meet the requirements.
Interestingly, in almost 3,000 pages of written text, the words “cryptocurrency,” “virtual currency,” “bitcoin” or the like never appeared. However, legislators brought a definition of the term “digital asset”, describing it as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”
This means all crypto assets, including their derivatives, are falling into the digital asset category.
Meanwhile, what information reporting would do, is to bring a value of comparison for the tax return documents of U.S. citizens. This puts crypto exchanges alongside banks, as banking institutions, as well as employers, have the obligation to report each worker’s salary, and the amount of interest they receive from investment products.
If the legislation is passed, the Internal Revenue Service, or IRS, would now be able to match the information from exchanges and the information filed by certain types of taxpayers. The bureau checks the tax return forms and compares them to the information, received by banks and employers. If a taxpayer falls to “match” the papers, this would typically lead to “matching error” IRS audits.
However, despite the legislation forcing exchanges to provide information about all transactions, the proposal does not affect the self-custodial area of cold wallets, or wallets, which are not tied to a certain exchange, as the legislative proposal considers them as money “under the mattress.
The paper does not explicitly state about the penalties but denotes that digital assets must be included in section 6724 of the Internal Revenue Code. The IRS may impose penalties up to $3,000,000 per reporter per tax year (for a combined $6,000,000 per year cap under IRC sections 6721 and 6722) but the penalty is not capped if the IRS determines the rules were not followed as a result of intentional disregard.
The penalties mean that the regulatory whiplash on crypto exchanges is one of the most fierce ones ever. The “intentional disregard” topic is widely considered among tax litigators, as the IRS almost always initially asserts intentional disregard is present.
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