Crypto Tax Reporting Limits Gain Bipartisan Momentum

Crypto Tax Reporting Limits Gain Bipartisan Momentum

A push for legislation to narrow the scope of a newly enacted tax reporting mandate for cryptocurrency brokers has gained traction in Congress as lawmakers in both parties call for new incentives to promote expansion of an emerging financial marketplace.

Several senior Democrats said potential limits on the tax information reporting mandate for cryptocurrency brokers enacted in the bipartisan Infrastructure Investment and Jobs Act could move in a package of extensions of expired tax incentives, including tax breaks for research and business interest expenses. They said other cryptocurrency-related tax measures could be examined in tandem with a proposal to clarify the reporting mandate's scope and moved in an omnibus spending bill to replace a House-passed stopgap spending measure, H.R. 6617, or other legislation.

Proponents of the legislative proposal said it was needed to make clear cryptocurrency miners and programmers are not covered by the infrastructure law's new mandate for information reporting by "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.''

The measure would reshape the definition of cryptocurrency brokers subject to the mandate under Internal Revenue Code Section 6045(c) for information reporting on Form 1099-B starting with transaction data for tax year 2023. It would complement pending guidance on the provision expected soon from the U.S. Department of the Treasury.

House Ways and Means Committee Chair Richard Neal, D-Mass., said proposals to tweak the scope of the new tax information reporting mandate would be evaluated as part of an examination of tax issues involving cryptocurrency and nonfungible tokens, or NFTs.

"I think that the whole process of cryptocurrency needs a full review here, a vigorous review. There are far too few who understand it," Neal told Law360.

In the Senate, Finance Committee Chair Ron Wyden, D-Ore., said he was disappointed no deal could be cut to curb the tax information reporting mandate before the bipartisan infrastructure deal was sent to President Joe Biden's desk in November.

Wyden said he would push for a proposal he developed with Sen. Cynthia Lummis, R-Wyo., to clarify that the information reporting mandate does not cover cryptocurrency miners, developers of digital assets and sellers of certain hardware and software used to control access to cryptocurrency.

"I did not support what was enacted," Wyden told Law360.

Sen. Mark Warner, D-Va., chair of the Finance Committee's Taxation and Internal Revenue Service Oversight Subcommittee, said he had encouraged Treasury in its pending regulation to limit the tax information reporting requirement so that it would not apply to cryptocurrency miners and programmers. Warner told Law360 that the definition of cryptocurrency broker in the infrastructure law "didn't have appropriate clarity" and should be restricted by Treasury regulations and additional legislation.

In a Dec. 14, 2021 joint letter to Treasury Secretary Janet Yellen, Warner and Sen. Rob Portman, R-Ohio, urged Treasury officials to ensure the tax reporting mandate only covers brokers engaged in the transfer of digital assets. They said the requirements should not cover individuals involved in "validating distributed ledger transactions through mining, staking or other methods, and entities solely providing software or hardware solutions," including digital asset wallets.

In a Feb. 11, 2022 letter to Portman, Jonathan Davidson, a Treasury assistant secretary for legislative affairs, said the department "intends to propose regulations that address the concerns expressed" by Portman and Warner. Davidson said Treasury agreed that "ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured" by broker reporting requirements, including those who validate transactions, write software code or sell storage devices for private keys.

Despite such assurances, Warner and Portman have signaled interest in moving legislation to limit the scope of mandatory tax information reporting on cryptocurrency transactions.

For their part, Republicans have pushed back against a reshaped version of Biden's proposals for family incentives and green energy tax breaks in the House-passed Build Back Better Act, H.R. 5376. But some Republicans have said they are open to bipartisan talks aimed at developing a new tax framework for cryptocurrency and other digital assets.

Sen. Ted Cruz, R-Texas, said it was important to ease tax requirements and other restrictions so that Texas and other states can attract investors and businesses from China, which has banned transactions involving Bitcoin and other virtual currencies and shut down cryptocurrency mining operations. Cruz told Law360 cryptocurrency was "unleashing entrepreneurs, many of whom are making Texas their haven."

"By far, the best solution is repeal," Cruz said, referring to the information reporting mandate for cryptocurrency brokers. But he also called for more discussion of the issue and said a "clarification that reduced the burden of what was mistakenly put in the infrastructure bill would be an improvement."

Other Republicans, including Portman and Lummis, have stressed the need for Congress to enact legislation to codify a more limited definition of cryptocurrency brokers subject to the tax information reporting mandate.

"Regulations can change, and guidance that is issued as a result of regulations can change. Statutes are so much more set in stone," Lummis told Law360.

Rep. David Schweikert, R-Ariz., a member of the Ways and Means Committee, said there was an opening for members of both parties to go beyond a clarification of the information reporting mandate and advance a broader tax framework for cryptocurrency transactions.

"I am actually hopeful because I think a number of members are tired of just dealing with just one piece of it," Schweikert told Law360, referring to the newly enacted information reporting mandate.

Schweikert said a potential package of cryptocurrency-related tax measures could include the bipartisan Virtual Currency Tax Fairness Act, H.R. 6582, sponsored by Rep. Suzan DelBene, D-Wash., which would provide a tax exemption for gains of $200 or less from changes in exchange rates after the disposition of virtual currency in a personal transaction.

Schweikert also has been pushing for the Keep Innovation in America Act, H.R. 6006, sponsored by Rep. Patrick McHenry, R-N.C., ranking member on the Financial Services Committee, which would reshape the information reporting mandate for cryptocurrency brokers.

McHenry has said his bill would fix a glitch in the cryptocurrency tax information reporting mandate and ensure it is "compatible with the way this technology actually works." McHenry has argued for a cautious approach to legislation dealing with cryptocurrency. His bill has been backed by 13 co-sponsors, including Schweikert, Rep. Kevin Brady, R-Texas, ranking member on Ways and Means, and five Democrats.

The bill would require cryptocurrency tax information reporting starting with transaction data for tax year 2025 by "any person who (for consideration) stands ready in the ordinary course of a trade or business to effect sales of digital assets at the direction of their customers." The measure also would direct Treasury to report to Congress within a year of enactment on the effects of the infrastructure law's definition of cryptocurrency as cash for reporting receipts in trade or business.

Rep. Tim Ryan, D-Ohio, a backer of the McHenry bill, said the measure had good prospects for attracting bipartisan support as a way to help the U.S. become the global hub for investing in virtual currencies.

"It's an opportunity for Congress to better understand what's going on with crypto," Ryan told Law360. "China shut it down. We should be stepping into this space." 


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Crypto Tax Reporting Limits Gain Bipartisan Momentumhttps://www.cbiz.com/Portals/0/Images/Hero-Article-CryptoReportingLimits.jpg?ver=bGfZFz4SQVL3uUc8cpG65A%3d%3dhttps://www.cbiz.com/Portals/0/Images/Thumbnail-Article-CryptoReportingLimits.jpg?ver=7n0W34i93bACh6fSk8-pgg%3d%3dA motion to narrow the scope of a reporting mandate for cryptocurrency brokers has gained traction in Congress.2022-02-15T18:00:00-05:00

A motion to narrow the scope of a reporting mandate for cryptocurrency brokers has gained traction in Congress.

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