In recent years, digital assets have caused a wave in the financial market. From cryptocurrencies like Bitcoin and Ethereum, to stablecoins like USDT, and even NFTs (non-fungible tokens), these new types of assets have not only attracted a large number of investors, but also sparked global technological innovation and regulatory discussions.

However, the rapid rise of digital assets has also brought about many problems. Due to their anonymity and cross-border mobility, tax authorities have encountered unprecedented difficulties in tracking and reporting these transactions. Oftentimes, the lack of transparency in taxation and compliance issues has caused headaches for regulatory agencies. In addition, due to the financial strain in the United States in recent years, after Binance was fined $4.6 billion, although a federal judge rejected some of the SEC's lawsuits against Binance and Zhao Changpeng, they have allowed other charges such as ICO issuance, continued sales of BNB, BNB Vault, staking services, unregistered and fraudulent charges to proceed and continue to be fined. However, the support of just one company is certainly not enough for the current U.S. finances. Therefore, in order to generate more revenue, the U.S. Congress passed the "Infrastructure Investment and Jobs Act" in 2021, which includes revisions to the "Internal Revenue Code," especially regarding reporting requirements for digital asset transactions. According to this act, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have drafted and released new regulations for reporting digital asset transactions. These regulations require financial institutions and brokers to report detailed information on digital asset transactions, including gross proceeds and adjusted bases of the transactions.

Aiying has summarized the entire report into three main parts, allowing you to clearly understand the main contents of this revised act:

I. Definition of Digital Assets

1. Scope of Definition

In these new regulations, "digital assets" are broadly defined as a form of value representation recorded on a cryptographic distributed ledger (such as a blockchain). Specifically, this includes but is not limited to the following types:

• Cryptocurrencies: such as Bitcoin, Ethereum, etc., which are currently the most widely recognized digital assets, mainly used for payments and investments.
• Stablecoins: such as USDT, USDC, etc., which are usually pegged to fiat currencies (such as the U.S. dollar) and are designed to maintain stable value for trading and payments.
• Non-fungible tokens (NFTs): such as digital artworks and collectibles, which represent unique assets, and each NFT is unique, widely used in art, music, gaming, and other fields.

The regulations have not yet finalized rules for unhosted wallets and related unhosted software. The IRS has stated that these tools may be considered as brokers, and specific regulations will be determined in the future.

In addition, the regulations also stipulate that the definition of digital assets is not limited to the above types. Any assets recorded using similar technology may be included in this category. This means that regardless of whether these assets are traded on-chain or off-chain, as long as they involve digital representations of value, they need to be reported (except for exempt types, as mentioned below).

II. Reporting Requirements

1. Main Requirements

The new regulations require brokers and financial institutions to report detailed information for each digital asset transaction. Specifically, they need to report how much money was made in each transaction (gross proceeds) and how much was initially spent to purchase it (adjusted basis).

2. Reporting Content

To comply with the regulations, brokers and financial institutions need to report the following information:

• Transaction date: The specific date when the transaction occurred.
• Transaction amount: The total amount of the transaction, i.e., how much was sold.
• Asset type: The type of digital asset involved in the transaction, such as Bitcoin, Ethereum, USDT, NFT, etc.
• Adjusted basis: The price at which you initially purchased these digital assets, minus some adjusted amount, to calculate net gains or losses.
• Counterparty information: Relevant information of the buyer and seller, ensuring transparent and traceable transactions.

3. Exemption Situations

• Stablecoins and NFTs

For stablecoins and NFTs, the regulations have some special reporting requirements and methods.

• Stablecoins: Stablecoins like USDT and USDC are usually pegged to fiat currencies such as the U.S. dollar, and their value is relatively stable. The regulations require reporting of stablecoin transactions, but to reduce the burden on brokers, certain types of stablecoin transactions may have simplified reporting methods. For example, for frequent small transactions, an aggregate reporting method may be used instead of detailed reporting for each transaction.

• NFTs: Non-fungible tokens (NFTs) represent unique digital assets, such as digital artworks, collectibles, etc. Most NFT transactions also need to be reported, but the regulations also take into account certain low-value NFT transactions, which may have simplified reporting requirements or exemptions. For example, if you are only buying and selling some low-value digital collectibles, detailed reporting may not be necessary as with high-value transactions.

• Closed-loop assets

"Closed-loop assets" refer to virtual assets that can only be used within specific systems and cannot be exchanged for fiat currency. Here are some related exceptions:

• In-game currency: If a virtual currency can only be used within a specific game or platform and cannot be exchanged for fiat currency such as the U.S. dollar, then this virtual currency may not fall within the reporting scope. For example, gold coins earned in a game that can only be used within that game do not need to be reported.
• Company internal points: Similarly, points issued by a company that can only be used internally within the company do not need to be reported as digital assets. If these points cannot be exchanged for external fiat currency and can only be used within the company, they are not within the scope of digital assets' definition.

Overall, the amended act aims to make digital asset transactions transparent and ensure that everyone pays taxes. Although eager to collect money, the regulations also "thoughtfully" consider the convenience of everyone's tax operations, such as exempting small transactions to avoid everyone being overwhelmed.

III. Implementation Date of the Regulations

1. Effective Date

The new regulations on reporting digital asset transactions will take effect 60 days after being officially published in the "Federal Register." Therefore, the specific effective date depends on when this regulation is published in the "Federal Register." In addition, some provisions of the regulations may have different effective dates, depending on the specific provisions of each clause. The act is divided into three phases:

• After December 31, 2023: This is the initial effective date of the regulations, indicating that from this point onwards, all relevant reporting and declarations need to comply with the new provisions.
• Operational compliance by 2025: This means that starting from 2025, all affected institutions need to fully comply with operational compliance requirements, including system updates, employee training, and the full implementation of reporting processes.
• Basis tracking by 2026: Starting from 2026, there will be requirements for tracking and reporting the basis of transactions (original purchase price and related adjustments). This may involve more specific and stringent tracking requirements to ensure that all transaction tax basis information is accurately recorded and reported.

2. Preparation Work

To ensure smooth compliance with the relevant requirements after the regulations take effect, relevant practitioners and institutions need to make the following preparations in advance:

• Update systems and processes: Ensure that your trading platform and backend systems can record and report all required information, such as transaction dates, amounts, asset types, etc. If necessary, existing systems may need to be updated or upgraded.
• Employee training: Ensure that all relevant employees understand the specific requirements and reporting processes of the new regulations. This includes training for both front-end and back-end staff to inform them of the information they need to collect and submit.
• Review and adjust policies: Review existing compliance policies and procedures to ensure they comply with the new regulations. If necessary, adjust internal policies to better enforce the new reporting standards.
• Communicate with clients: Inform clients about the changes in the new regulations, and let them know what information they need to provide to ensure they understand their new obligations.
• Establish a compliance team: If not already in place, consider establishing a dedicated compliance team responsible for overseeing and managing all digital asset transaction reporting matters, ensuring that all transactions comply with the new regulations to avoid legal issues.
• Test reporting processes: Before the regulations take effect, conduct simulated tests to ensure that all systems and processes can run smoothly. This includes testing the reporting process to check if it can accurately capture and report the required information.

By making these preparations, relevant practitioners and institutions can ensure they are fully prepared before the new regulations take effect, ensuring smooth compliance with all new reporting requirements after the regulations are implemented. This not only avoids legal risks but also ensures that businesses remain compliant and competitive in the new regulatory environment.

Summary by Aiying

Overall, these new regulations on reporting digital asset transactions will have a significant impact on the financial market and tax compliance. They will make investors more cautious when trading, prompt trading platforms to upgrade systems and processes, increase market transparency, but also raise compliance costs.

The definition of "digital assets" in the act is overly broad. Almost every NFT transaction and stablecoin transaction will require reporting, and even operations such as exchanging USDC for USD will need to be reported to the IRS, even if it's just a few cents of profit or loss. This policy may discourage people from trading on exchanges and instead turn to DeFi, thus having the opposite effect.

References

1. U.S. Congress. "Infrastructure Investment and Jobs Act," 2021. Link.

2. U.S. Department of the Treasury, Internal Revenue Service. "Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions." Federal Register, 88 FR 59576, August 29, 2023.

3. U.S. Department of the Treasury. Amendments to the "Internal Revenue Code." Link.

4. Official website of the Federal Register. Link.

5. IRS Announcement. "Guidance on Reporting of Digital Asset Transactions," 2023. Link.

6. Academic research and industry reports. "Digital Asset Market and Tax Compliance," 2022. Link.

Link to the Federal Register

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