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‘People Who Use NFTs to Hide Their Wealth Should Be Very Worried’: How the U.S. Infrastructure Bill Will Crack Down on Crypto Trading
The infrastructure bill has some surprising changes in store for the de-fi universe.
Late Friday night, the U.S. House of Representatives passed the Infrastructure Investment and Jobs Act, a $1.2 trillion spending bill the Senate had already approved in August.
Most of the 2,740-page bill, which is currently awaiting President Biden’s signature, focuses on revamping America’s aging roads, bridges, and ports. But to get it passed, lawmakers had to include provisions to pay for the new spending. Cracking down on crypto tax evasion and underreporting was one way to help foot the bill.
The section of the bill dedicated to “information reporting for brokers and digital assets” outlines new crypto tax reporting requirements, which will make it much more difficult for NFT traders to disguise their identities. (Many NFT trades take place anonymously.)
The new crypto reporting requirements take effect January 1, 2023, and thus will affect tax returns filed in 2024. It applies to all businesses, which can include individuals. In fact, the only businesses that are exempt from it are financial institutions.
Breaking it down, the first provision is an amendment to a section of the Internal Revenue Code that significantly expands the definition of brokers. Now, a “broker” includes anyone who “is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Essentially, all crypto exchanges and NFT marketplaces fall into that category. They are now brokers.
As such, they have specific reporting requirements. Brokers have to fill out Form 1099-B regarding their proceeds and submit it to the I.R.S. If you operate an NFT platform, you will need to collect your customers’ name, address, and taxpayer identification number to include in the form.
One of the problems is that many NFT platforms—Rarible, OpenSea, and Foundation, to name a few—are decentralized, meaning that trades happen peer-to-peer without an intermediary involved, though the centralized company behind the platform takes its cut. So will these decentralized marketplaces be considered brokers too? How will they handle reporting?
“Centralized platforms will likely qualify as brokers,” Omri Marian, a University of California Irvine law professor, told Artnet News. As for decentralized exchanges, the companies operating the platforms can require anyone who uses them to provide identifying information, which can then be shared with counterparties.
Otherwise, if the platform is truly decentralized, the burden falls on the buyers and sellers themselves. “They will have to identify each other,” Marian explained. This is where the second provision comes in.
The infrastructure bill includes a change to a section of the U.S. tax code to add “digital assets” as a form of cash. Crypto wants to be taken seriously as a new form of money, and now it is.
The code states that any person in the course of a trade or business who receives more than $10,000 in cash or equivalents (like cashier’s checks and money orders) has to report it to the IRS within 15 days.
The occasional seller or purchaser of an NFT will not be captured by the new rule because they are not conducting the trade in the course of business, Marian said, “but platforms who do it as a business model will be captured.”
The form used to report the income, form 8300, is issued jointly by the IRS and the Financial Crimes Enforcement Network. The IRS says that such information helps combat money laundering, tax evasion, and other illicit activities. Unlike all other IRS information reporting requirements, any violation of 6050I is a felony, subject to a fine or even up to five years in prison.
So far, crypto enthusiasts have been calling the new provisions overly harsh and invasive.
“In the business of creating/reselling #NFTs? Get used to filing Form 8300, and obtaining social security numbers and identification of your buyers,” tweeted James Yochum, a CPA who specializes in crypto accounting.
Brian Armstrong, CEO of Coinbase, whose company is poised to launch an NFT marketplace any day now, called the new legislation a “disaster” for crypto. It’s a “[c]riminal felony statute that could freeze a lot of healthy crypto behavior (like Defi),” he said.
However, there are some who argue that if crypto wants to fulfill its dream of being treated like real money, then it needs to step up and comply with real money rules.
“This is about preventing tax evasion and other financial crimes, like money laundering,” Marian said. “Selling an NFT is a taxable event, but our tax enforcement is built on voluntary reporting.” People are more likely to fully report if they know a third party has already sent in the information. Plus, if one party reports a transaction but the other doesn’t, the IRS is likely to ask questions.
There is still a lot to be ironed out in the new crypto reporting rules. Ultimately, it is up to the Treasury Department to spell out how the new provisions will work in practice.
“If I were a law-abiding NFT buyer/seller, I wouldn’t worry just yet,” Marian said. “People who use their NFTs to hide their wealth should be very worried, though.”
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