NFTs Take Notice: Infrastructure Bill Imposes New Regulations on Crypto Transactions
The Infrastructure Investment and Jobs Act signed into law by President Biden on November 15, 2021, includes new provisions that may impact the future market for cryptocurrencies and NFTs. Those provisions (discussed below) are scheduled to be effective for financial statements and returns required after December 31, 2023, meaning that transactions made during 2023 may be impacted and should be tracked if likely to fall under the law. We expect the exact contours of the law may change somewhat over the next two years, as cryptocurrency and decentralized finance lobbyists have signaled a push for amendments and the U.S. Treasury Department (which will be responsible for enforcement) will take some time to decide what entities may be required to comply. Further guidance from the Treasury Department should become available before the law goes into effect in 2023.
The “Broker” Provision
The first provision expands the definition of certain regulated securities to include digital assets, and expands the definition of a securities “broker” to include persons providing services “effectuating transfers of digital assets on behalf of another person.” Persons who fall under this definition of “broker” will be required to report specific information about covered digital asset transactions in a Form 1099-B to both the IRS and their customers.
A major critique of this provision is that the definition of “broker” is vague in the bill and could be read to include not only currency exchanges but also crypto miners, developers, stakers, and other individuals who do not have customers and so would not have access to the necessary information to comply. There are also concerns regarding the accuracy of the 1099-B forms because exchanges generally lack visibility into what individual coin traders may have in their personal self-custody wallets, resulting in potentially overstated 1099s that require investors to sort out inaccuracies themselves. The U.S. Treasury Department will ultimately determine what parties will fall under this definition of “broker,” so it is not yet clear whether it will affect game developers or platforms that engage with digital assets, or whether a more traditional definition of “broker,” that limits enforcement to coin exchanges and the like, will apply. While we think the latter is more likely, we will have to will have to stay tuned to see if the Treasury agrees.
The “Digital Assets” Provision
The second provision expands the reporting requirements of Tax Code Section 6050i to include digital assets, including NFTs. Sec. 6050i requires persons engaged in a trade or business who receive more than $10,000 in cash and equivalents in the course of that trade or business to report that income and the identity of the transferor to the IRS. Now that cryptocurrencies and NFTs are included under this umbrella, persons that receive digital assets valued at $10,000 or more will have to make these reports. The required report includes details about who sent the assets, including names and Social Security numbers, and failure to report this information is a felony offense.
Many people prefer cryptocurrency use expressly for its anonymity, and as such information on the transferor’s identity is not always readily available, especially in instances of decentralized finance transactions. Requiring brokers and businesses to report this information means that the anonymity of transactions may need to decrease to avoid violating the law. For game developers and platforms that engage with cryptocurrencies and/or NFTs, this rule appears to mean that purchases of cryptocurrency or NFTs valued over $10,000 will need to be reported to the IRS. The platform or entity from whom the cryptocurrency / NFT is purchased is likely to be the party responsible for making such a report. If your platform will engage in such transactions, it may be worthwhile considering technical means to facilitate this reporting.
This article does not constitute legal advice. Specifically, this firm does not practice tax law and does not offer tax advice. If these new regulations are likely to affect you, you should consult with tax professionals once the final scope of the law and related regulations becomes clear.