With the passage of the Infrastructure Investment and Jobs Act, commonly referred to as the “infrastructure bill,” the Internal Revenue Code of 1986 was amended to define brokers, and more importantly, digital assets. (PL 117-58, Sec. 80603 et seq.) A broker will have to report digital asset transfers moved to the account of an unknown person or address. Brokers will need to adhere to the “Know Your Customer” (KYC) principles. The new law defines digital assets as, “…any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology….” (Sec. 80603 (b) (D)
The infrastructure bill also expanded the “cash” reporting provision applicable to cryptocurrencies. It extended reporting requirements for certain transactions over $10,000 in cash to include the new category of “digital assets,” including cryptocurrencies. The infrastructure bill amends 26 U.S.C. § 6050I, the anti-money laundering “cash reporting” to include transactions in “digital assets.”
FinCEN’s mission was strengthened under the National Defense Authorization Act (NDAA) (PL 116-283) to combat illegal activities. NDAA states, in part, “although the use and trading of virtual currencies are legal practices, some terrorists and criminals,…, seek to exploit vulnerabilities in the global financial system and increasingly rely on substitutes for currency, including emerging payment methods (such as virtual currencies)… (Sec. 6102 (a) (3))
In November 2021, the Presidential Working Group Report on Capital Markets (PWG), joined by the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a report on stablecoins. In brief, stablecoins are a type of digital asset designed to maintain value relative to the U.S. dollar, but in the future, stablecoins could be used as payment. The PWG called for stablecoin issuers to be regulated as depository institutions. (US Department of Treasury Press Release, November 1, 2021)
What this means for our customers…
Conditional on how the reporting obligation is interpreted and implemented, it may require businesses to collect information and report to the Internal Revenue Service details about crypto transactions. Although this new reporting takes effect in 2024, to allow for possible issuance of regulations, businesses must prepare for wide ranging Anti-Money Laundering (AML) reporting. Failure to comply can result in penalties up to $3 million per year and possible much higher penalties if the failure is intentional. Willful violators can also face up to five years imprisonment and corporate violators face fines up to $100,000.
Businesses will need to have extensive KYC, AML and tax reporting infrastructures. If they are using stablecoins, they should be prepared to meet possible future regulatory requirements.