Reporting Requirements
Section 6045 aims to establish specific reporting requirements for brokers in the digital asset industry. This section mandates that every individual or entity operating as a broker must submit a return that includes relevant information about their customers, such as gross proceeds, and other details as required by the Treasury. With the enactment of the Infrastructure Investment and Jobs Act (IIJA), Section 6045(g) now extends these reporting requirements to digital assets and stipulates that brokers must also disclose the customer’s adjusted basis.
To provide further clarity, proposed regulations have been introduced to define the term “broker” within the context of Section 6045. These regulations encompass a range of entities involved in digital asset trading, payment processing, hosted wallets, and the redemption of self-created digital assets. In essence, the definition of a broker under these proposed regulations is broad enough to encompass various parties that facilitate the sale of digital assets when they have access to customer information and can identify the parties involved in the transactions.
The proposed regulations also clarify that individuals or entities who sell or license software to unhosted wallet users and provide services facilitating the buying or selling of digital assets are considered brokers. However, the term “broker” does not extend to merchants that accept digital assets in exchange for goods or services, individuals solely engaged in transaction validation through mechanisms like proof-of-work or proof-of-stake, or entities exclusively involved in selling hardware or software without offering additional functions or services. It is anticipated that decentralized exchanges will fall under the definition of a broker according to these proposed regulations, thereby requiring them to collect customer information and report sales information about their customers.
The scope of a “sale” under these regulations encompasses various digital asset transactions. This includes the exchange of a digital asset for either cash or stored-value cards, the exchange of a digital asset for a different digital asset, and the delivery of a digital asset as part of the settlement for forward contracts, options, regulated futures contracts, similar instruments, or other executory contracts. Moreover, the definition of a sale is broadened to include transactions involving digital assets facilitated by real estate reporting persons or entities involved in property sales. Furthermore, certain transactions related to digital assets entered into by “digital asset payment processors,” as defined in the proposed regulations, are also considered sales.
It is important to note that the IRS explicitly states that certain transactions do not fall under the definition of a sale. These include cases where customers receive new digital assets without disposing of something else in exchange, instances where customers receive digital assets through airdrops, or situations where a broker’s customer is given digital assets in return for providing services.
The proposed regulations aim to provide a comprehensive framework for reporting requirements in the digital asset industry. By defining the term “broker” and expanding the definition of a sale, these regulations seek to ensure proper compliance and reporting of transactions involving digital assets. As the digital asset landscape continues to evolve, it is crucial for both brokers and customers to be aware of these reporting obligations and to stay updated on any changes or additions to the regulations.