Late on November 5, 2021, the House passed (228-206) H.R. 3684, INVEST in America – the infrastructure bill that has received a lot of attention this year. It already passed in the Senate on August 10 (69-30).

One of the few tax items here and added for tax gap concerns is to expand the definition of broker under §6045 to require additional reporting for certain digital asset transactions. A few observations:

1. There are much bigger tax gap concerns than misreporting or non-reporting of digital asset transactions such as underreporting and non-reporting by some cash businesses.

2. The text added to §6045 requires actions by the IRS and is confusing and potentially too broad to be administrable (unless the IRS addresses that broadness). The issue is that “broker” is expanded to include: “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” While the goal was likely to make virtual currency exchanges such as Coinbase and Kraken be brokers, the reach is potentially wider. For example, what about a company that provides various software for transfers or wallets? 

Digital asset is also broad and warrants input from IRS: “Except as otherwise provided by the Secretary, the term “digital asset” means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”

That last phrase reminds me of the cryptic item in the 2020 Form 1040 instructions on the broadness of “virtual currency.” The instructions for the virtual currency questions included for 2020: “Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.” [page 17 of 2020 Form 1040 instructions] What does that mean?

I have a track changes version of §6045 and related provisions that were modified by H.R. 3684 (Sec. 80603), which can help see the set of changes to broker reporting that were made.

These changes are effective for statements required by be furnished after 12/31/23 so there is time for the IRS to issue proposed regulations and get public comment.

What do you think?