New reporting requirements on cryptocurrency, non-fungible tokens, and other digital asset transactions.
The US Senate passed the “Act of construction of America of 2021” also known as the Biparty Infrastructure Bill, which includes new reports for cryptocurrency transactions and cryptocurrency brokers and provides for penalties for non-compliance. These new requirements, along with the application of bank secrecy law to works of art and collectibles, which include non-fungible tokens, mean a major overhaul in estate planning and fiduciary selection.
The bill would require companies that transmit digital assets to file tax information reports similar to the Form 1099 requirements for stock brokers. The definition of a person responsible for filing such reports is broad: “any person who (for a fee) is responsible for regularly providing any service performing digital asset transfers.” This is intended to require information reporting for cryptocurrency exchanges, but could be interpreted as a larger network to force other segments of the blockchain industry, such as payment service providers to cryptocurrency, to file information reports.
Since the tax-free section 1031 similar exchange rules do not apply to the conversion from one cryptocurrency to another cryptocurrency, the bill could be interpreted as including information on all digital asset exchanges, whether the exchange involves the US dollar or any other fiat currency. Likewise, the bill may also require the reporting of any unintentional receipt of cryptocurrencies in the form of hard forks, airdrops, or other rewards. Typically, airdrops occur when a new blockchain project distributes free tokens to existing holders of specific cryptocurrencies such as Bitcoin and Ethereum.
The term “digital asset” is defined as “… any digital representation of value that is recorded on a cryptographically secure distributed ledger or similar technology…” This would apply not only to transactions but also to a represented business interest. by blockchain token, utility tokens, visual and sound works by means of non-fungible tokens (NFTs) or any other valuable cryptographic representation that may unfold in the future. Since an art dealer selling NFTs does so for a consideration, the IRS could require dealers who sell NFTs to file tax information reports on the sale of those digital assets, even if the merchant uses a third party platform to sell NFT rather than its own platform to execute its sales.
The IRS will also be able to trace the transfer of digital assets when there is no sale or exchange that would otherwise trigger an IRS reporting obligation by requiring a dealer or broker to file. tax information returns to report transfers of digital assets that are not part of a sale. , or exchanges from an account maintained by brokers to an account that is not maintained by, or an address not associated with, a person whom the broker knows or has reason to know is a broker. This is intended to cover a transaction in which a cryptocurrency holder on one exchange transfers the cryptocurrency to a personal wallet or a maintained wallet on another exchange, and any business that receives digital assets over $ 10,000 in a single transaction file reporting information with the IRS.
The bill means that succession plans that include any type of digital asset in an estate will become more complicated. Planning should not only preserve the benefits of digital assets, such as the security, privacy and convenience that digital assets now enjoy, but also protect them from the risks of non-reporting of transactions as well as problems of loss of an asset. private key. or phrase of departure, fluctuation in value and most importantly the fact that few, if any, institutional trustees are willing or able to manage these digital assets. The lack of such readily available trustees means that many estate planning tactics, such as those using trusts, can become impractical. This is especially true if, under the new application of the Banking Secrecy Act to works of art and collectibles, which includes non-fungible tokens, they will face heavy penalties for not reporting such transactions. to the IRS.
This bill has not yet been passed in the House and there is opposition to the broad scope of the disclosure provision. If the bill is passed in its current form, the proposed changes would affect digital assets acquired on or after January 1, 2023, and would apply to returns due and returns due after December 31, 2023.