My Attorney Is A Robot

Last week, a significant development emerged in the way businesses report digital asset transactions. The U.S. Treasury Department and the Internal Revenue Service announced updates relating to the Infrastructure Investment and Jobs Act. Originally scheduled to take effect on January 1, 2024, the Act modifies the reporting requirements for transactions exceeding $10,000 to include digital assets. However, a key announcement made on January 16 indicates that until further detailed regulations are formulated, businesses are not obliged to report digital asset transactions in the same manner as cash transactions. This postponement highlights the prevailing uncertainty in the future regulatory framework and the compliance responsibilities for businesses engaged in cryptocurrency transactions.

The Infrastructure Investment and Jobs Act

Section 6050I of the Internal Revenue Code historically required businesses to report cash transactions over $10,000. The Infrastructure Investment and Jobs Act, effective January 1, 2024, significantly amends this provision. A notable change is the expansion of the term “cash” to include digital assets like cryptocurrencies, acknowledging their increasing significance in the economy. This amendment, under Section 80603(b)(3) of the Act, aims to bring digital asset transactions under similar scrutiny as traditional financial transactions.

Additionally, the Act introduces major changes to 26 U.S. Code § 6045. It redefines the term ‘broker’ to encompass not just traditional exchange platforms such as Coinbase and Robinhood but also cryptocurrency miners and software developers. Consequently, these entities must now report detailed personal and transaction information of each customer, including names, addresses, and social security numbers.

Furthermore, an amendment to 26 U.S. Code § 6050I introduces a requirement for reporting business transactions involving $10,000 or more in cryptocurrency. Entities engaged in such transactions are obliged to report relevant details to the IRS, including the payer’s name and address, taxpayer identification number, transaction amount, date, and nature. It should be noted that the IRS did not address this section in its announcement.

Finally, the Act imposes severe penalties for non-compliance. Failure to file a report within 15 days or submission of a report with incorrect or incomplete information can lead to significant consequences. Individuals may face a fine of up to $25,000 or a prison sentence of up to five years. Corporations could incur fines of up to $100,000, along with the possibility of imprisonment. These stringent penalties highlight the Act’s emphasis on rigorous compliance with the new reporting standards.

Compliance Issues

These amendments have sparked considerable concern, especially in terms of compliance challenges and potential constitutional conflicts. According to Jerry Brito, the executive director of Coin Center, there is considerable ambiguity about how to comply with the new reporting guidelines. The law requires detailed reporting for transactions exceeding $10,000 in digital assets, including personal information like the sender’s social security number and date of birth.

The practicality of these reporting requirements poses a substantial challenge. For instance, in scenarios where a miner or validator receives block rewards over $10,000, it’s unclear whose personal details should be reported. Similarly, when engaging in decentralized exchanges of crypto-for-crypto, identifying the other party to report becomes complex. Moreover, the issue intensifies with anonymous transactions, such as receiving Bitcoin or Ether to a public address, where the sender’s identity is unknown. This ambiguity risks turning law-abiding citizens into inadvertent felons due to potential non-compliance.

Coin Center has highlighted that the amendment could inadvertently ban cryptocurrency mining in the United States. This is because miners often lack access to the personal information required by the new law, making compliance impossible. In response, Coin Center proposed a de minimis exemption for crypto transactions and suggested that the IRS should not apply second-party reporting requirements.

Beyond compliance difficulties, Coin Center has raised constitutional issues in a lawsuit against the Treasury Department. The first claim addresses the violation of the Fourth Amendment, arguing that forcing individuals to collect and report extensive personal information about others to the government without a warrant constitutes an unreasonable search and seizure. The second claim focuses on the First Amendment, positing that demanding politically active organizations to create and report lists of their donors’ names and identifying information to the government would significantly chill political association and speech. This could deter individuals from joining or contributing to such organizations, fearing government surveillance and retribution.

Why This Matters

The utilization of cryptocurrency in business transactions is experiencing significant growth, driven by an increasing demand from payees for digital currency payment options. Although shopping with cryptocurrency is still a relatively novel concept for many, PYMNTS research reveals a marked preference for it among tech-savvy consumers. Over one-third of these consumers show a preference for merchants that accept cryptocurrencies, and 26% are even willing to switch to retailers that offer crypto payment options. This emerging trend signals a substantial opportunity for the wider acceptance and integration of cryptocurrency payments within the global payment solutions landscape.

Stephen Pair, CEO of BitPay, a leading crypto processing platform, underscores this trend. BitPay’s support for litecoin, initiated in July 2021, led to processing over 200,000 transactions cumulatively valued at more than $35 million. This rapid adoption has made litecoin the second most popular currency for crypto-based transactions on BitPay, second only to bitcoin. The platform’s extensive network of global merchants, who are increasingly embracing cryptocurrency, indicates a growing trend in the retail sector. Additionally, BitPay’s ongoing plans to expand its merchant base further reinforce the growing relevance of cryptocurrencies in global business transactions.

Conclusion

In conclusion, the recent developments surrounding the Infrastructure Investment and Jobs Act and its impact on cryptocurrency transactions mark a pivotal moment in the evolving intersection of digital currencies and regulatory frameworks. The Treasury and IRS’s postponement of the new crypto reporting provisions reflects the complexities and challenges inherent in integrating emerging technologies like cryptocurrencies into existing financial and legal systems. This delay, while temporary, underscores the broader uncertainties and compliance hurdles that businesses face in navigating the cryptocurrency landscape.

The amendments to the Internal Revenue Code, particularly the expansion of the “cash” definition and the redefinition of ‘brokers’, signal a recognition of the growing role of digital assets in the economy. However, they also bring to light significant concerns about privacy, data security, and the potential for overreach. The issues raised by Coin Center in their lawsuit, citing violations of the Fourth and First Amendments, highlight the delicate balance between regulatory oversight and the protection of individual liberties.

Meanwhile, the rising consumer preference for cryptocurrency transactions indicates a strong and growing demand for digital currency options in the marketplace. This trend, coupled with the potential for cryptocurrencies to streamline and revolutionize payment systems, suggests that digital assets will continue to gain prominence in global business transactions.

As the landscape evolves, it will be crucial for regulatory bodies, businesses, and consumers alike to navigate these changes thoughtfully. Balancing the need for regulation with the protection of privacy and innovation will be key to ensuring the sustainable and ethical growth of cryptocurrency usage in the global economy. The outcome of these legislative and legal challenges will likely set important precedents for the future of digital currencies and their role in business and society.