Effective January 1, 2024, digital asset transfers in excess of $10,000 will be subject to KYC and IRS reporting requirements under the Infrastructure Investment and Jobs Act. Crypto Criminal Defense Blog Post
June 2023 has shaped-up to be a pretty eventful month for crypto with the SEC filing lawsuits against the two largest cryptocurrency trading platforms in the world to multiple major TradFi firms filing Bitcoin ETF applications. And with Congress scheduled to finally vote on proposed digital asset legislation, July 2023 is also likely to bring more major crypto headlines. If the Bill makes it out of the House, then it will proceed to the Senate and if passed there, to the President’s desk for signature into law. If signed into the law, the Bill would finally bring long-awaited legislative clarity to the digital asset space.
A major issue that still remains unresolved is how digital asset brokers are defined and to what extent they must comply with KYC reporting requirements. If Congress fails to pass any comprehensive digital asset legislation this year, then a very controversial section of the 2021 Infrastructure Investment and Jobs Act will go into effect. That provision will impose increased tax reporting and KYC requirements on digital asset transactions in excess of $10,000.
Back in March of 2022, I sat for an interview with Bored Ape Gazette to discuss the know your customer (KYC) requirements signed into law as part of President Biden’s Infrastructure Investment and Jobs Act.
Under the 2021 Infrastructure Investment and Jobs Act, digital asset transfers in excess of $10,000 will be subject to KYC and IRS reporting requirements. Failure to comply with this law can trigger negative tax consequences and even possible criminal prosecution. This new law goes into effect in 2024 and applies to tax returns and statements required to be made after December 31, 2023. In the meantime, amendments have been proposed to modify this provision of the law and it remains to be seen how this will all unfold. Bored Ape Gazette
According to the Joint Committee on Taxation:
The provision amends section 6045(c)(1) so that the definition of broker expressly includes any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. The change clarifies present law to resolve uncertainty over whether certain market participants are brokers. The change is not intended to limit the Secretary’s authority to interpret the definition of broker.
In addition, the provision specifies that the definition of specified security includes a digital asset, which, except as provided by the Secretary, is defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary. A digital asset acquired through a broker on or after January 1, 2023, is a covered security subject to basis reporting under section 6045(g).
Required IRS tax filings under Section 6050I parallel reports required from merchants and services providers under the Bank Secrecy Act. As a consequence, the Job’s Act also amends the “cash reporting” requirements of 26 U.S.C. § 6050I to encompass transactions in “digital assets.” This provision of the Act is intended to address anti-money laundering (AML) gaps in the realm of convertible virtual currencies (CVCs) and digital assets. Under U.S. federal law, the Financial Crimes Enforcement Network (FinCEN), is tasked preventing and combating money laundering by enforcing anti-money laundering regulations and laws. FinCEN administers the nations primary anti-money laundering law, the Bank Secrecy Act (BSA).
The BSA requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering. FinCEN also mandates financial institutions to file Suspicious Activity Reports (SARs) for any suspicious transactions that may signify money laundering, tax evasion, or other financial crimes. The BSA also requires banks to file Currency Transaction Reports (CTRs) for cash transactions exceeding $10,000 in one business day. FinCEN shares the information it collects with law enforcement agencies to investigate and prosecute money laundering and other related financial crimes.
FinCEN also enforces the requirement that financial institutions establish an AML compliance program. These programs should include a system of internal controls to assure ongoing compliance, independent testing of BSA compliance, specifically designated individuals responsible for managing BSA compliance, and training for appropriate personnel.
FinCEN has also started regulating virtual currencies to prevent their misuse in money laundering. Under the Jobs Act, the U.S. Treasury must pass a set rules for how FinCEN will handle the filing of KYC and records for transactions involving certain digital assets.
As the deadline nears for implementation of this provision of the Jobs Act, there is still no clarity on how Treasury will enforce the digital asset provisions relating to brokers. This presents a problem because as written, the Act could have a serious chilling effect on the digital asset space.
Under the provision, recipients of digital assets will be required to report the sender’s name, address and Social Security number within 15 days. Civil penalties for those who accidentally overlook the requirement can reach as high as $3 million. And recipients who intentionally disregard it can be charged with a felony and face up to five years in prison and higher civil penalties. Corporate violators face fines of up to $100,000 per transaction. Recipients of Digital Assets Must Report Senders' Identity to IRS Starting in 2024, or Face Penalties or Criminal Charges
In December 2022, Senator Patrick McHenry wrote a letter to Treasury Secretary Janet Yellen requesting that the United States Department of Treasury “prioritize rulemaking for Section 80603 of the Infrastructure Investment and Jobs Act (IIJA) and delay any related compliance requirements.”
We write to request that you prioritize rulemaking for Section 80603 of the Infrastructure Investment and Jobs Act (IIJA) and delay any related compliance requirements. To date, a number of questions and concerns remain unanswered regarding the scope of Section 80603. These questions and concerns must be addressed to ensure taxpayers have clear direction on the forthcoming requirements and the date required for compliance. As we have previously noted, Section 80603 is poorly drafted. As such it could be wrongly interpreted as expanding the definition of a “broker” beyond custodial digital asset intermediaries. It also directs Treasury to incorporate digital assets into the definition of “cash” for tax collection and reporting purposes. The 6050i reporting requirements jeopardize the privacy of Americans, without a comprehensive analysis of the impact of such change. Treasury’s acknowledgement that “ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by reporting requirements for brokers” is a positive step. It is also consistent with the policies outlined in H.R. 6006, Keep Innovation in America Act, which I introduced last year. Treasury must provide clarity regarding the full scope of Section 80603 as emphasized in the bipartisan proposal. Given the significance of these issues, Treasury cannot evade the formal rulemaking process by issuing an interpretive final rule or merely issuing guidance. These provisions were the subject of much debate. Any rulemaking or guidance that fails to appropriately interpret these provisions will damage the privacy of American taxpayers and stifle innovation through rising compliance costs and unnecessary regulatory burdens. We urge Treasury to immediately publish the rules directed under Section 80603 and delay the effective date of Section 80603 to allow market participants to conform to any new requirements. Thank you again for your attention to this important matter. McHenry Letter
According to McHenry’s office Treasury thereafter responded and released “guidance stating that brokers are not required to report the additional information required until final regulations are issued and much needed clarity is provided on section 80603.”
On March 27, 2023, McHenry “reintroduced the Keep Innovation in America Act for the 118th Congress alongside Rep. Ritchie Torres (NY-15) and a bipartisan group of lawmakers. The legislation will fix the digital asset reporting provisions in the Infrastructure Investment and Jobs Act, now law (PL 117-58), and provide much needed clarity to technology innovators and entrepreneurs.”
If no changes or amendments are made to Section 80603 by December 31, 2023, then effective January 1, 2024, digital asset brokers will need to come into compliance with the IRS return requirements as well as implement and comply with KYC and AML standards under FinCEN’s.