Compliance Briefing — November 15, 2021
The Infrastructure Investment and Jobs Act expands IRS reporting to digital asset brokers, requiring Form 1099-B basis reporting and $10,000 digital asset payment disclosures from 2023 onward, driving urgent investments in tax data pipelines, customer diligence, and control frameworks.
Executive summary. Section 80603 of the Infrastructure Investment and Jobs Act (IIJA), enacted on 15 November 2021, amends Internal Revenue Code sections 6045, 6045A, and 6050I to expand tax information reporting to “brokers” that effect transfers of digital assets, requiring Form 1099-B reporting of gross proceeds and cost basis beginning with transactions occurring after 31 December 2023 and imposing cash-equivalent reporting for digital asset payments above $10,000.[1] The law defines digital assets broadly as any digital representation of value recorded on a cryptographically secured distributed ledger, capturing cryptocurrencies, certain stablecoins, and tokenised assets, and significantly expands the population of intermediaries subject to IRS reporting and due-diligence obligations.[2]
Definition of broker. The IIJA revises the broker definition to include any person who (for consideration) is responsible for regularly providing services effectuating transfers of digital assets on behalf of another person.[1] This potentially encompasses centralised exchanges, hosted wallet providers, some decentralised finance (DeFi) platforms operating through service contracts, and payment processors that facilitate digital asset transfers. Treasury retains authority to issue regulations clarifying scope, excluding actors that merely validate transactions (e.g., miners, stakers) where appropriate.
Reporting obligations. Brokers must:
- Form 1099-B filings: Report customer identifying information, gross proceeds, acquisition dates, cost basis, and character (short- or long-term) for digital asset dispositions, similar to securities reporting. This requires capturing customer tax identification numbers (TINs) and verifying identity.
- Transfer statements: Furnish transfer statements to other brokers under section 6045A(d) when digital assets are transferred between platforms, enabling the receiving broker to determine basis and holding period. Statements must be delivered within 15 days of transfer.
- Section 6050I reporting: Treat digital asset receipts over $10,000 in a trade or business as cash, triggering Form 8300 filings within 15 days and requiring collection of payer information (name, address, TIN, nature of transaction).
- Customer statements: Furnish annual statements to customers reflecting reported information by 31 January of the following year.
Effective dates and regulatory timeline. Statutory provisions apply to returns required to be filed, and statements required to be furnished, after 31 December 2023, covering digital asset transactions completed in calendar year 2023 onward.[1] Treasury and IRS are expected to issue implementing regulations, draft forms, and potential safe harbours before the effective date. Stakeholders should monitor rulemaking for clarifications on broker scope, valuation methodologies, and treatment of DeFi protocols.
Implementation roadmap. Digital asset intermediaries should initiate cross-functional programmes spanning tax, compliance, legal, engineering, and customer operations:
- Governance and accountability: Assign executive ownership (tax director, chief compliance officer) and establish steering committees to oversee readiness. Document policies aligning with IRS reporting requirements and update risk appetite statements.
- Customer due diligence (CDD): Enhance onboarding workflows to capture TINs, legal names, addresses, and entity classification. Implement verification controls (e.g., TIN matching) and monitor for suspicious activity consistent with FinCEN expectations.
- Data architecture: Build data pipelines that consolidate on-chain activity, off-chain order books, and fiat gateways. Track acquisition lots, cost basis adjustments (including forks, airdrops, staking rewards), and holding periods at a per-wallet/per-account level.
- Valuation and pricing: Implement reliable market data sources to translate digital asset prices to U.S. dollars at the time of acquisition and disposition, handling thinly traded tokens, stablecoin pegs, and high-volatility events. Document methodologies and fallback procedures.
- Tax form generation: Integrate tax engines capable of generating Form 1099-B and Form 8300 outputs, including electronic delivery options and customer dispute workflows. Ensure systems capture lot relief methods (FIFO, specific identification) consistent with IRS guidance.
- Transfer statement management: Design processes to trigger 6045A(d) statements when customers move assets to other platforms. This may require standardised file formats (e.g., JSON, CSV) and secure transmission protocols.
- Controls and assurance: Implement reconciliations between blockchain records, internal ledgers, and tax reports. Establish testing routines for data completeness and accuracy, and coordinate with internal audit or third-party assurance providers.
Compliance controls. Key controls should cover:
- Access and segregation of duties: Restrict edit rights on tax data, maintain audit trails, and separate roles between engineering, operations, and tax teams.
- Data quality checks: Validate that all reportable transactions include acquisition and disposition timestamps, wallet addresses, and valuation inputs. Flag missing basis information and implement remediation workflows.
- Exception management: Use case management systems to track customer disputes, invalid TIN notices, and corrected filings. Monitor error rates and resolution times.
- Record retention: Retain supporting documentation (KYC records, transaction logs, correspondence) for at least five years, aligning with IRS audit windows.
- Regulatory change management: Maintain a register of IRS notices, FAQs, and proposed regulations. Update policies and systems promptly and document decision rationales.
Withholding and penalty exposure. Brokers classified under the amended Section 6045 must apply backup withholding when customers fail to provide valid TINs, mirroring obligations for traditional securities brokers.[1] Update withholding procedures and customer communications to explain potential withholding on gross proceeds if tax forms remain incomplete.
Risk considerations. Failure to comply can trigger penalties under sections 6721 (failure to file), 6722 (failure to furnish), and 6723 (failure to comply with other requirements), alongside potential enforcement by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), or state regulators if inaccurate reporting indicates broader compliance failures. Section 6050I violations carry criminal penalties for wilful non-filing.
Metrics and monitoring. Track progress via key indicators: percentage of customers with validated TINs, completeness of basis data, timeliness of Form 1099-B/8300 filings, number of corrected returns, and closure time for IRS notices or customer inquiries. Monitor transaction volumes by asset type to prioritise testing and scenario planning.
Stakeholder engagement. Participate in industry comment letters, collaborate with trade associations (Blockchain Association, Chamber of Digital Commerce), and coordinate with custodians, liquidity providers, and institutional clients on data-sharing protocols. Educate customers about forthcoming reporting changes, emphasising tax compliance obligations and potential withholding or account restrictions for non-responsive users.
Future outlook. Treasury may propose additional rules to address decentralised protocols, non-fungible tokens (NFTs), and stablecoin arrangements. FinCEN is expected to align AML reporting with tax requirements, increasing the value of integrated compliance platforms. Organisations that invest early in data governance, reporting automation, and customer education will mitigate enforcement risk and support scalable digital asset services.
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