From Coders to Brokers: New 1099-B Report Proposal for Crypto Miners and Software Developers | Hanson Bridgett LLP

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Key Points The Infrastructure Investments and Jobs Act (HR 3684) adopted in the Senate a broad definition of “broker” to target cryptocurrency information transmitted to the IRS. In the absence of an amendment, the bill places obligations similar to IRS Form 1099-B on various technology providers in the crypto industry, even if they do not trade digital asset transactions and do not have information necessary to comply.

On August 10, 2021, the Senate voted 69 to 30 to adopt the Law on Investment in Infrastructure and Jobs. To help fund all expenses, section 80603 of the bill introduces increased tax reporting requirements on transactions in cryptocurrency and other digital assets. Despite widespread industry outcry, the controversial provision advances in the House of Representatives with its broad definition of “broker” intact. Opponents argue that the bill’s sweeping language could amount to a ban on crypto mining in the United States and spur critical technological development abroad.

Back to base

Under Notice 2014-21, the IRS currently classifies cryptocurrency as property for tax purposes. Upon a realization event, all related capital gains and losses are subject to income tax and reporting requirements. However, crypto exchanges have not always provided the IRS or taxpayers with enough cost-based information as needed to complete Form 8949 and Schedule D for these asset sales. Instead, cryptocurrency investors and traders are responsible for tracking the cost base of their own transactions to report taxes. Basic discrepancies between third-party reporting forms and tax returns have also triggered flawed IRS notices on crypto sales in recent years.

When drafting the bill’s reporting provision, lawmakers intended to cover cryptocurrency exchange platforms under a standardized Form 1099 regime with corresponding penalties, like traditional brokerage houses. These platforms would be required to report the adjusted basis and the character of the gain or loss on the sale of digital assets by a user, including cryptocurrencies such as Bitcoin, Ethereum, or XRP. In itself, the incorporation of a cost base functionality would present a significant challenge for trading systems. Yet vague language extends these reporting requirements far beyond centralized cryptocurrency exchanges.

“Brokers” of “Digital Assets”

Section 6045 of the Internal Revenue Code generally imposes information reporting requirements on those who “do business as a broker” in relation to sales on behalf of clients. The Infrastructure Bill amends these rules to include in the definition of broker “any person who (for remuneration) is responsible for regularly providing any service that transfers digital assets on behalf of another person”. To this end, a “digital asset” means “any digital representation of value that is recorded on a cryptographically secure distributed ledger or similar technology”.

Based on the imprecise wording of the bill, various non-custodian blockchain technology providers may represent “brokers” subject to reporting obligations. For example:

Proof-of-Stake Validators and Proof-of-Work Miners – Any party engaged in mining or staking activities could be considered to be “carrying out digital asset transfers” by acting as an intermediary for cryptocurrency transactions on a network, in the broad sense. Blockchain Node Operators or Delegates – Running network software to secure blockchain and broadcast transactions effectively plays a facilitating role in digital asset transfers. Software Developers – Simply building platforms designed to trade or earn tokens (or make open source code available for others to do) can create unforeseen risk for broker and exchange reports. . Crypto Wallet Providers – Although more distant, even the sale of hardware or software storage for private keys providing access to cryptocurrency could be seen as a “broker” for digital assets.

In each of these cases, compliance of the information reports does not appear to be achievable. These providers generally do not have access to the personal and financial data necessary to provide a 1099 with respect to transactions. For example (and by design), a validator on the blockchain does not know the identity of the parties involved in the transaction.

While competing amendments sought to address these issues, the original text survived the Senate without any exemptions or clarifications. The debate is expected to continue when the House reconvenes in September. It remains to be seen how the definitions of “broker” and “digital assets” evolve and whether third-party cost-based reporting becomes the law for cryptocurrency.

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