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Federal Tax

Crypto Miners, Wallet Makers May Not Be Digital Asset Brokers, Strategist Says

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

Positing who should need to report certain cryptocurrency transactions under a controversial recent addition to the Tax Code, a former tax litigator and Capitol Hill investigator turned industry strategist said a delayed reporting regime could ultimately cover exchanges, but perhaps not individual miners.

Speaking at a July 26 webinar hosted by the Tax Policy Center, John Schoenecker, government relations and regulatory strategy director for crypto tax software provider TaxBit, said who is considered a digital asset broker under Code Sec. 6045—established by the Infrastructure Investment and Jobs Act (IIJA; PL 117-58)—will ultimately come down to how decentralized does an entity need to be that they likely won’t have the sort of reportable information that is useful to the government, which has made clear its intention of closing compliance and revenue gaps from crypto transactions.

The late 2021 bill enacted crypto information reporting rules under Code Sec. 6045 and Code Sec. 6045A originally slated to come online for dispositions of digital assets beginning this year. 2022 served as a grace period to allow taxpayers to get in the habit of recordkeeping and time for the IRS to come out with guidance on who is a digital asset broker.

Under the IIJA, a digital asset means “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified” by Treasury. A digital asset broker is defined as “any person who (for consideration) is responsible for regularly providing any services effectuating transfers of digital assets on behalf of another person.”

Two days before Christmas last year, though, the incoming information reporting requirements were put on ice until the issuance of final regs. Lawmakers since then have called for the IRS to prioritize the regs amid debates over how limited in scope the definition of a digital asset broker should be.

According to Schoenecker, the definition of digital asset broker “arguably applies to four different types of potential brokers”:

  1. Centralized crypto exchanges where customers create accounts and participate in trading
  2. Decentralized Finance (DeFi), which “does a lot of the same things minus swapping in and out cash for crypto”
  3. Manufacturers of cold wallets, or hardware with private keys
  4. Blockchain validators like miners and stakers.

“The last two are probably not going to be considered brokers just because as Treasury puts it, they don’t have the information” the IRS is looking for,” he said. “It’s a hard argument to make that [centralized exchanges] are not brokers, I think.”

The potential gray area revolves around so-called smart contracts, software-controlled transactions that facilitate crypto selling except for cash. These transactions are conducted by protocols, and “there’s no person sitting at that website’s office, if there even is an office,” to make sure things go through, Schoenecker explained.

Entities that create such protocols argue lean into being decentralized and may not have Know Your Customer compliance guidelines, anti-money laundering procedures, or even tax reporting, he added. “So the real question that I suspect Treasury is wrestling with is: How deep do we go down this path of decentralization? How decentralized do you have to be before you’re not considered a broker?”

 

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