US Treasury proposes to expand crypto broker reporting requirements to combat overseas tax evasion

The U.S. Treasury Department released its 2022 revenue explanation at the same time the White House released Biden’s budget proposal.

In addition to its broader goals of closing tax loopholes and expanding the size of the Internal Revenue Service (IRS), the Treasury Department also sent notices to crypto asset brokers, including exchanges, requiring them to impose new reporting requirements on potential beneficial ownership.

On May 28, the Biden administration released its 2022 budget proposal. In addition to the new budget proposal, the U.S. Treasury Department also released an explanation of the government's revenue proposal.

As the administration has claimed for months, the new spending plan is massive, consistent with the Biden team’s ambition to expand the IRS to fund the new spending.

Notably, the Treasury Department highlighted its new goal of expanding cryptocurrency reporting requirements to combat tax evasion.

"Tax evasion using crypto assets is a rapidly growing problem," the Treasury Department said in an explanatory document. "The global nature of the crypto market provides U.S. taxpayers with opportunities to hide assets and taxable income by using offshore crypto exchanges and wallet providers."

The U.S. Treasury Department has proposed expanding the requirement for cryptocurrency brokers, including exchanges and custodial wallets, to report the beneficial owners of accounts, which would then enter an automatic international reporting network to which the U.S. is already a party. The proposal aims to make the requirement mandatory on tax returns starting in 2023.

As stated in the original proposal:

“The proposal would expand the scope of information reporting by brokers reporting crypto assets to include reporting certain beneficial owners of entities that hold accounts with the broker. This would enable the United States to automatically share such information with appropriate partner jurisdictions, in order to reciprocally receive information about U.S. taxpayers who engage in crypto asset transactions outside the United States, either directly or through passive entities, pursuant to the global automatic information exchange framework. The proposal would require brokers, including entities such as U.S. crypto asset exchanges and custodial wallet providers, to report information related to certain passive entities and their significant foreign owners when reporting crypto assets held by such entities in broker accounts. If enacted, and combined with current law, the proposal would require brokers to report gross proceeds and such other information as the Secretary of State may request regarding sales of crypto assets to customers and, in the case of certain passive entities, their significant foreign owners.”

The broad goal of identifying potential beneficial ownership of businesses and legal entities has grown significantly over the past decade. In early 2021, the United States passed legislation to restrict anonymous ownership of companies nationwide as part of a broader effort to combat the same problem in money laundering.

The Treasury Department has begun using cryptocurrency as another front in the war. The Financial Crimes Enforcement Network, or FinCEN, has been considering rules to know counterparty information for self-hosted wallets that trade with exchanges, which would undoubtedly affect the crypto industry.

Cryptocurrency exchanges operating in the United States are expected to retain information on their customers, so the real change that the Treasury Department can foresee seems to be the exchange of information between international exchanges.

Meanwhile, in breaking down the estimated revenue from the changes, the Treasury Department estimated that expanding reporting requirements for cryptocurrency brokers would have a “negligible revenue impact.”