November 13, 2023
Internal Revenue Service
1111 Constitution Avenue., NW
Washington, DC 20224
Re: Comments on the Proposed Regulations for Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions
Ladies and Gentlemen,
The Securities Industry and Financial Markets Association (“SIFMA”)1 welcomes the opportunity to submit comments on the proposed digital asset reporting regulations2 implementing section 80603 of the Infrastructure Investment and Jobs Act of 2021 (the “IIJA”) regarding gross proceeds and basis reporting by brokers for digital asset transactions.
SIFMA appreciates the substantial and thoughtful work of the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) in developing the proposed regulations. This letter comments on concerns that SIFMA’s members have identified in the proposed regulations and provides recommendations for clearer and more administrable rules that address the unique nature of digital assets.
I. Executive Summary
As discussed in more detail in Section II, and to address the concerns raised in the proposed regulations, SIFMA makes the following recommendations:
- Section II.A.: Limit the scope of digital assets to exclude certain types of assets that have no gain or loss, do not impede the government’s drive to increase tax compliance with respect to digital asset flows, or are tied to an underlying non-digital asset or backed by any existing collateral or reserve (e.g., tokenized assets where the underlying assets are already subject to IRS Form 1099-B reporting should be excluded). Clarify the reporting of grantor trust interests in cases where the grantor trusts own digital assets. Finally, provide a safe harbor for brokers in determining the applicability of IRS Form 1099-B or IRS Form 1099-DA.
- Section II.B.: Clarify the application of “a digital representation of value” to exclude digital asset uses of distributed ledger technology and blockchains for internal ledger purposes because such uses are unlikely to create reportable sale transactions, and also exclude blockchain-based deposit accounts, because the transactions are identical to those taking place on legacy systems. Similarly, add a definition of “closed systems” that covers an exemption from reporting for digital assets transacting within permissioned systems. Finally, eliminate “any similar technology” from the definition of digital asset to properly exclude a number of technology improvements being implemented by financial institutions.
- Section II.C.: Update the various rules that govern interactions between brokers, such as the multiple broker rule, the cash on delivery rule, and the definition of exempt recipient to avoid duplicative reporting.
- Section II.D.: Narrow the definition of “digital asset middleman” to include only a person that provides facilitative services that directly effectuate the relevant sale.
- Section II.E.: Provide greater clarity on who is a digital asset broker and what qualifies as providing hosted wallet services, particularly in the context where multiple digital asset brokers are involved in effectuating the transactions.
- Section II.F.: Remove the requirement to report transaction IDs, digital asset addresses, and timestamps, as these data points do not communicate meaningful tax information. Allow brokers to use the time zone corresponding with their location of transacting for determining transaction dates.
- Section II.G.: Include a de minimis exception for digital asset information reporting requirements, similar to the reporting requirements for other IRS Forms 1099.
- Section II.H.: Exempt from backup withholding the sale of digital assets that are unable to be fractionalized where there is insufficient fiat currency in the account after the sale to cover the full amount of backup withholding that would otherwise be due. Provide greater clarity on what is a reasonable valuation method for digital assets and how to apply backup withholding where the broker cannot determine with reasonable accuracy the value of received digital assets.
- Section II.I.: Remove the new US indicia that are solely applicable to digital assets.
- Section II.J.: Defer the application of the regulations to controlled foreign corporation (“CFC”) digital asset brokers and non-US digital asset brokers pending further progress on the announced plan for the US to participate in the Organisation for Economic Co-operation and Development’s (“OECD”) Crypto-Asset Reporting Framework (“CARF”).
- Section II.K.: Change the effective date for implementing the regulations to no earlier than at least 18 months after the issuance of the final regulations and begin on the following January 1, to coincide with the IRS information reporting cycle Correspondingly, modify the applicable date for a digital asset to qualify as a “covered security” to align with the effective date of the remainder of the regulations.
1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the US and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, DC, is the US regional member of the Global Financial Markets Association (GFMA).
2 REG 122793-19, 88 Fed. Reg. 59576 (Aug. 29, 2023) (the “proposed regulations”).