Global implications of US Treasury’s new crypto reporting rules
Crypto Tax & Accounting Technical Director, Dion Seymour, discusses the US Treasury’s proposed regulations for reporting cryptoassets and their wider implications for global reporting frameworks, in Thomson Reuters Regulatory Intelligence.
Dion’s article was published in Thomson Reuters Regulatory Intelligence, 22 September 2023.
The U.S. Treasury has released proposed regulations for reporting cryptoassets (termed “digital assets”). The proposals run to nearly 300 pages, suggesting that the U.S. Treasury, working with the Internal Revenue Service (IRS), has done its homework and has carefully thought through the issues and wider problems.
The proposals represent a significant change in reporting within the United States and (arguably) demonstrate how important it
considers the impact of cryptoassets to be.
The proposals bring what are called “digital brokers” into the scope of similar information-reporting regulations that exist for intermediaries such as stockbrokers. If the proposal is accepted, a new form, 1099 DA, will be required to be provided to the IRS from 2025 for cryptoasset exchanges (platforms) and from 2026 for other brokers.
Within the proposal, a digital asset broker has been widely defined to include the following intermediaries:
• digital asset trading platforms
• digital asset payment processors
• certain digital asset-hosted wallet providers
• persons who regularly redeem digital assets that were created or issued by that person
• real estate reporting persons to report on real estate purchasers who use digital assets to acquire real estate.
The rationale provided in the proposal is that, without a reporting mechanism, the IRS would be unable to tackle the tax gap, making regulation necessary to encourage tax compliance.
Current limits on information gathering are referenced, even though the IRS has served “John Doe” summons that have required
exchanges such as Coinbase to provide information.
It should be noted, however, that these summonses can be administratively burdensome to take through the legal process, and to date, few have been issued. Other tax administrations, such as HM Revenue and Customs in the UK, have used similar rules to gather information from exchanges in the UK.
It is suggested that the information from the digital brokers will help investors determine if they owe taxes and help the IRS identify those who have not paid.
To quote the proposal, it will identify those “who engage in digital asset transactions [which] will help the IRS to identify taxpayers who have engaged in these transactions, and thereby help to reduce the overall tax gap. The proposed rule is also expected to facilitate the preparation of tax returns.”
Questions have been raised as to whether enhanced obligations for digital brokers will reduce the competitive market in the United States. The proposal does not remove any of the existing obligations that have been placed on cryptoasset exchanges under the Fifth Money Laundering Directive (5MLD) and wider securities regulation.
It cannot be denied that the obligations being placed on cryptoasset exchanges continue to mount; the United States is becoming a difficult environment, where regulation by enforcement is taking its toll on crypto businesses.
In this case, however, the question is whether the proposals put U.S. exchanges under greater burden than elsewhere.
Cryptoassets continue to evolve, as do the regulations. Tax administrations have been quieter than financial regulators but that does not mean that they have not been working in the background.
The keen-eyed reader will note that the proposal refers to the Organisation for Economic Cooperation and Development’s (OECD) Crypto-Asset Reporting Framework (CARF), which is an international framework for reporting cryptoassets.
The United States has yet to make any public announcements as to whether or not it will ratify the agreement. The proposal does not confirm whether the United States will join the agreement, but it does provide one of the strongest indications that the United States may be looking to sign up for CARF.
It was perhaps a coincidence that CARF was raised at the recent G20 conference in New Delhi just weeks after the U.S. proposals were published. CARF is a significant step in terms of international transparency.
If the United States does not ratify CARF, it would be unable to access the information from the other members. In contrast, if the United States does join CARF, the information in the proposal will be required to be gathered by the IRS to meet its associated obligations.
While CARF may “only” cover the G20 countries, this does include two-thirds of the world’s population, but it may not stop there. The OECD’s other tax transparency agreement, the Common Reporting Standard (CRS), has now been ratified by more than 100 jurisdictions, although notably, this does not include the United States.
Crypto transparency is not unique to the OECD and the United States, however. The EU has also released regulations to increase the transparency of cryptoassets with the latest version of its information standard, the Directive on Administrative Cooperation 8 (DAC8).
The requirements under DAC8 are very similar to those under CARF, but most notably, unlike CARF, DAC8 requires that non-EU cryptoasset exchanges report transactions where they have an EU citizen as a customer.
For example, if an exchange in Panama has EU citizens as customers, they would need to provide the same information as if they were located in the EU.
One thing these agreements have in common is that they focus on the existence of a centralized party that can adhere to these obligations. There remains an unanswered question as to how the obligations will be enforced if there is no identifiable party, as is the case with some decentralized platforms.
Moves to increase transparency
The new broker rules from the U.S. Treasury could be just the latest in a move by tax administrations worldwide to increase transparency regarding cryptoassets.
Furthermore, work by the EU, OECD and now the United States to develop regulations presents a challenge for other authorities, which must decide whether they will join and share information or risk just being left with their exchanges having to report but failing to get any information in return.
As the cryptoassets sector becomes ever-more visible, it remains to be seen what will happen to those jurisdictions that do not join these agreements. At first glance, it may seem that locating in those places could reduce their operational burden, but, as the EU directive has shown, that does not stop obligations for businesses located there.
Photo by Traxer on Unsplash.