Treasury and the IRS Should Issue Digital Asset Broker Reporting Guidance Quickly
By Taylor Cranor and Mike Kaercher
The Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) should quickly publish guidance and forms necessary to ensure proper reporting of digital asset transactions to customers and to the IRS. Congress mandated this reporting in the bipartisan Infrastructure Investment and Jobs Act, enacted in 2021, and it was the core of reporting changes estimated to raise nearly $28 billion through 2031. If Treasury fails to publish guidance quickly, there is a risk that billions of dollars of taxes already owed will go unreported and unpaid. Congressional lawmakers and multiple recent media reports have noted that the unexplained delay in this guidance is concerning because the IRS has an obligation to implement this statutory requirement, and because the requirement is aligned with the Administration’s stated priorities of reducing tax evasion, lowering deficits, and increasing clarity for filers in ways that will limit unnecessary and inefficient audits on accurate and honest filers.
What is driving the delay remains unclear. Treasury and the IRS submitted proposed regulations to the Office of Information and Regulatory Affairs (“OIRA”) for review on January 10, 2023, and OIRA completed its review on February 23, 2023. Four months later, the proposed regulations have yet to be published.
This is an unusual delay for tax regulations. And if proposed regulations are not issued soon, there is a risk of the IRS and Treasury having to delay implementation for an additional year. The IRS and Treasury’s December 2022 announcement stated that new reporting will not be required until final regulations are issued. Proposed regulations will be followed by a comment period (typically 60 or 90 days), and then Treasury and the IRS will need to review those comments and decide what changes to make to the regulations before finalizing them.
Since it is now June, unless the Treasury and the IRS move quickly, there is a serious risk that the first round of final regulations will not be issued this year, putting billions in revenue in jeopardy. They should issue the proposed regulations immediately, and then move quickly to finalize them.
The Code provides broad authority for Treasury and the IRS to require brokers and other middlemen to send information returns to customers and the IRS to document certain transactions. For example, information regarding sales of stocks is typically reported on Form 1099-B (Proceeds From Broker and Barter Exchange Transactions), or on an equivalent statement. Form 1099-B requires brokers to report identifying information of the customer, the amount the property was sold for, and other key information. For stocks and other specified securities, brokers must also report basis (generally, the amount paid for the stock) to help their customers and the IRS determine the amount of income on the sale, since only the gain is taxable. The broker sends copies of Form 1099-B to the customer, the IRS, and in some cases, the state tax department. This way, all the key players have the information they need to improve tax compliance. Compliance rates for income subject to some third-party reporting like broker reporting exceed 80%, compared with compliance rates below 50% for income without third-party reporting.
IRS Commissioner Werfel in testimony before the Senate Finance Committee, as well as previous IRS Commissioners, have highlighted the need to invest in tools to reduce the digital asset tax gap. And the IRS Strategic Operating Plan pledges to “increase enforcement pertaining to digital assets.”
Congress acknowledged this need by taking three key steps in the Infrastructure Investment and Jobs Act. First, it required broker reporting on digital assets, meaning that third-party brokers report identifying information of the customer and the gross proceeds of digital asset sales to the IRS and taxpayers. Second, Congress made digital assets “specified securities,” meaning that brokers must include “basis” in reporting on digital asset transactions (the value used as the starting point for calculating any gain or loss), similar to what is required for stocks, bonds, commodities, and other assets. Brokers must also include in their reports whether any gain or loss incurred is long-term or short-term, which may affect the rate at which it is taxed. Third, Congress extended information reporting that is already required on certain cash payments exceeding $10,000 to digital assets. That is, Congress simply extended existing information reporting regimes to digital assets, which had otherwise been excluded from requirements applied to similar kinds of assets.
The changes to digital asset broker reporting have three main potential positive effects:
First, this reporting makes it easier for taxpayers to understand and comply with their tax obligations. Digital asset brokers will send customers a Form 1099 documenting relevant information they will need for tax filing. That’s a far simpler way for taxpayers to collect that information than manually recording or tracking down all relevant transactions during the year and will ease recordkeeping burdens and increase accuracy.
Second, by improving tax compliance, this reporting can raise substantial revenue, make IRS compliance efforts more efficient, and help ensure that audits focus on the most egregious tax cheating rather than on honest filers who have accurately complied with their obligations.
Information reporting from third parties, like the reporting required by this provision, is a highly effective “front-end” tax compliance measure that works primarily by increasing voluntary compliance. In addition to helping filers track and report transactions, information reporting discourages would-be tax evaders from trying to hide income, because filers know that the IRS will have documentation of that income on file. Further, any remaining tax evasion using digital assets becomes easier and more efficient for the IRS to spot because the IRS will be able to use 1099s to better detect would-be tax cheats’ attempts to evade taxes and to follow up with an audit or other compliance activity. That will in turn help improve the efficiency of audits by reducing the share of audits of filers who are in fact paying all the taxes they owe.
In these ways the reporting regime, if implemented, will raise revenues and reduce deficits. Indeed, when Congress enacted the Infrastructure Investment and Jobs Act, it relied on these revenues being raised to offset the cost of other investments. Given congressional and Administration focus on deficit reduction (including absurd cuts to IRS funding that will in fact increase deficits), it makes no sense to leave on the table tax revenues that digital asset investors already owe but aren’t paying by further delaying implementation of this statutory requirement.
Third, improved compliance reduces an inefficient subsidy for digital asset investors who cheat on their taxes. The lack of information reporting on digital assets is an anomaly, given the information that brokers of other assets have to provide to customers and the IRS. This disparate treatment allows for continued tax evasion by those using digital assets that cannot occur with other assets — an economic tax cheating advantage. This tilt may encourage financial resources, computing power, and energy to flow to digital assets rather than other industries and uses.
For these reasons, improving tax compliance on digital assets would improve the integrity of the tax system broadly.
Congress provided that the broker reporting changes would begin with transactions completed in 2023, with the first round of reporting issued in January of 2024. However, in December 2022, Treasury and the IRS announced that “[b]rokers will not be required to report or furnish additional information with respect to dispositions of digital assets under section 6045, or issue additional statements under section 6045A, or file any returns with the IRS on transfers of digital assets under section 6045A(d) until those new final regulations under sections 6045 and 6045A are issued.”
The JCT estimate of the enacted provision suggests that this could risk up to roughly $1.5 billion in revenues. (This JCT estimate is for calendar year 2024 but, because of when tax returns are filed, will generally reflect transactions that occurred in 2023. The estimate reflects both the changes to the broker reporting provisions and the extension of information reporting on certain cash payments to digital assets.) The actual revenue impact will differ depending on developments of the size of the digital assets market, the economy and other factors that the estimate could not have taken into account at the time it was issued.
The IRS and Treasury should not compound any revenue loss with further delay. The proposed regulations should be issued so that the law Congress enacted comes fully into effect and has its intended impact of more owners of digital assets paying the taxes that they already owe under the law.
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