For a while, waiting for IRS guidance on crypto taxation was feeling like the Lana Del Rey (with Sean Lennon) song, “Tomorrow Never Came.” (“… I waited for you in the spot you said to wait, in the city, on a park bench, in the middle of the pouring rain ….”) But, for us at least, tomorrow did come. The IRS released new crypto tax guidance after a hiatus of 5 years and there’s a hint of more on the horizon.
There are other bits of tax information reporting nuggets from the IRS this October as well: another possible extension of the transition period for section 871(m) dividend equivalent payment rules, a new FATCA FAQ on offshore taxpayer identification number (TIN) collection requirements, more draft forms and instructions relating to the new/revived Form 1099-NEC and final regulations on section 6050Y reportable life insurance policy sales.
1. Taxation of Virtual Currency Meets Reality, and Information Reporting Guidance is Coming
As we have noted on our blog, the IRS released 43 new FAQs and a revenue ruling on taxation of virtual currency earlier this month. The new crypto tax guidance focused on tax rules affecting taxpayers holding convertible virtual currencies (such as bitcoin) as capital assets. This guidance was issued following an initiative begun this past summer where the IRS has been sending taxpayers who have transacted in cryptocurrency one of several versions of “educational letters.”
But while the new guidance clarified some rules (tax treatment of crypto “hard forks” and allowable cost basis methodologies), many questions remain. For financial intermediaries facilitating crypto trades, chief among them is what information reporting regime, if any, is applicable. And the news is that this guidance is coming. The latest IRS Priority Guidance Plan, also released in October, contains an added item for guidance on information reporting on virtual currency under section 6045. The implication is that not only is guidance on its way but that we would be looking at Form 1099-B reporting for proceeds from broker and barter exchange transactions (the purview of section 6045).
Even as the IRS ramps up its enforcement efforts to urge taxpayers to report and pay tax on their crypto transactions, there is a recognition that that third-party information will be key to compliance. Information reporting is likely now the new focus of the IRS.
2. Section 871(m) and Section 1446(f) Updates
Back from our attendance at the October SIFMA global tax reporting conference – here’s what we have on section 871(m) and section 1446(f), two topics of interest to brokers in particular:
(a) Section 871(m). An IRS official at the conference noted that the IRS is planning on providing an extension to the current transition rules relating to section 871(m) dividend equivalent payments. The extension may come as part of IRS efforts to finalize certain section 871(m) temporary regulations. But little was uncovered in terms of what these final rules may say or even the timing.
Section 871(m) treats certain payments with respect to derivatives (e.g., a total return swap referencing a U.S. stock) as essentially U.S. sourced dividends subject to withholding tax.
Current transition rules, however, generally only bring what are known as delta-one products into scope. Delta-one products are ones that track the value of the underlying referenced stock on a one-to-one basis. Under current transition rules, section 871(m) rules applying to non-delta-one products are deferred through the end of 2020. These transition rules also allow for the simplified application of certain combined transaction rules and provide for derivative dealers that act as “Qualified Derivative Dealers” transitional relief through 2020.
(b) Section 1446(f). Although questions were raised, there were few if any inklings as to how or when section 1446(f) regulations will be finalized, though the IRS seemed to be aware of concerns raised with regard to a framework that requires withholding on sales of publicly traded partnership (PTP) interests – e.g., DVP transactions and time required to implement systems for essentially gross proceeds withholding.
Proposed section 1446(f) regulations that were issued in May of this year would require brokers to withhold at a rate of 10% on proceeds from the sale of PTPs by non-US holders (and, in some cases, distributions from the PTPs to such holders) unless certain exceptions apply. Final section 1446(f) regulations are, like crypto information reporting guidance, on the IRS Priority Guidance Plan for 2019-2020.
3. New FATCA FAQs on TIN Collection
Offshore, Reporting Model 1 IGA FFIs continue to have trouble collecting U.S. TINs from pre-existing reportable account holders. Notice 2017-46 had provided a grace period for collecting these TINs through 2019 but that grace period would not apply to 2020 data. To provide some relief to FFIs that continue to be unable to obtain these U.S. TINs (despite trying to do so), the IRS has added a new FAQ to its list of FATCA FAQs on reporting.
The new FAQ (FAQ #3 in the Reporting section) does not extend the grace period but notes that the IRS will not automatically treat a financial institution as being in significant noncompliance for a missing TIN but would look at the overall facts and circumstances – including effort expanded in collecting the TIN.
In part, the relatively lengthy FAQ response reads:
“The IRS will not automatically conclude that the absence of a TIN leads to a determination of significant non-compliance. Instead, the IRS will take account of the facts and circumstances leading to the absence of the TIN, such as the reasons why the TIN could not be obtained, whether the FI has adequate procedures in place to obtain TINs and the efforts made by the FI to obtain them. If the U.S. determines that an FI is in significant non-compliance, the U.S. would notify the exchange partner and will work with the partner, to include further appropriate consideration of the facts and circumstances, over the next 18 months to address the non-compliance. The FI would have at least 18 months from the date of the notification of noncompliance to correct the TIN error before the IRS took any other further action, such as removing the FI’s Global Intermediary Identification Number from the IRS FFI List.”
Removal of one’s GIIN from the IRS FFI List is a bit of a death knell in FATCA parlance, since it means the financial institution would be subject to FATCA withholding. So the FAQ is of some comfort – no exemption but effort counts.
4. Revival of Form 1099-NEC
It looks like Form 1099-NEC is becoming close to reality for calendar year 2020. The IRS released draft instructions in October for Form 1099-NEC and Form 1099-MISC for 2020, affirming that nonemployee compensation will be separated out from Form 1099-MISC and reported instead on new Form 1099-NEC. The IRS also released an update version of Form 1099-NEC. As tax reporting folks know, nonemployee compensation reporting has an earlier filing due date (January 31) than other income items on a Form 1099-MISC. The relegation of nonemployee compensation to the new Form 1099-NEC is intended to reduce confusion with respect to filing due dates for the Form 1099-MISC. The change though will require a review by tax reporting teams – to accommodate Form 1099-NEC (if applicable) and to account for format changes to Form 1099-MISC due to the break-out of the nonemployee compensation.
5. Final Regulations on Reportable Sales of Life Insurance Contracts
The IRS has released final regulations relating to information reporting for certain policy sales of life insurance contracts and payments of reportable death benefits. The final regulations under Section 6050Y (enacted as part of the 2017 tax reform law) provide updated guidance for reporting on new Forms 1099-LS and 1099-SB and also on Form 1099-R with respect to reportable death benefits.
Reporting under section 6050Y is often triggered when an investment fund purchases life insurance policies from individuals who may no longer wish to retain them. The purchaser in this case must generally report the sale, including to the issuer of the policy. The issuer must also report certain cost basis information once it is notified of the sale. Death benefits paid with respect to such a reportable life insurance policy sale would generally also be reportable when paid.
The final regulations provide generally that section 6050Y reporting would be required only for sales occurring after December 31, 2019 and allows for certain transition rules for certain sales occurring prior to the publication of the final regulations in the federal register.
Financial institutions that have departments that deal with life insurance policies may wish to review the final regulations for reporting guidance.
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