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TAX CLINIC

In the ruling, the IRS noted that law and instead resorted solely to the 2021. Under the legislation, an informa-
there is no definition of “brokerage plain meaning of the term as found in tion return (Form 1099-B, Proceeds From
services” in Sec. 1202 and no explanation a dictionary. Broker and Barter Exchange Transactions)
in the legislative history. Citing case law Most obviously, the IRS disregarded must be filed with the IRS by a party fa-
holding that “[w]ords in a statute gener- the definition of the term in the regula- cilitating the transfer of cryptocurrency
ally are presumed to bear their ordinary, tions under Sec. 199A. Sec. 199A(d)(2) on behalf of another person as a broker
contemporary, common meaning,” the references the Sec. 1202 list of excluded (Sec. 6045(c)(1)(D)). The legislation also
IRS turned to dictionary definitions of trades or businesses in enumerating its requires a business that receives crypto-
the term “broker”: “one who acts as an own list of “specified service” trades or currency worth more than $10,000 in a
intermediary: such as ... an agent who businesses. Accordingly, many of the single transaction to report the transac-
negotiates contracts of purchase and Sec. 1202 excluded businesses, includ- tion to the IRS on Form 8300, Report of
sale (as of real estate, commodities, or ing brokerage services, have fleshed-out Cash Payments Over $10,000 Received in
securities).” In applying this definition, definitions within the Sec. 199A regula- a Trade or Business (Sec. 6050I). These
the IRS concluded that the corporation tions (for “brokerage services” under Sec. new information reporting requirements
was not a mere intermediary because 199A, see Regs. Sec. 1.199A-5(b)(2)(x)). will apply to returns required to be filed,
the corporation performed administra- Although these definitions explicitly and statements required to be furnished,
tive services under its contracts with apply only to Sec. 199A, the lack of beginning in 2024.
the insurance companies (reporting definitions for excluded qualified trades The discussion below focuses on
claims/incidents and keeping records of or businesses within Sec. 1202 may drive cryptoasset guidance issued to date by
transactions and correspondence). Ac- some taxpayers to refer to the specified the IRS.
cordingly, the corporation was granted a service trade or business definitions by
ruling that it was engaged in a qualified analogy. The approach the IRS took in Background
trade or business. Letter Ruling 202114002 should give According to the IRS’s definition,
Although letter rulings may not taxpayers some pause in relying on the virtual currency (the term the IRS
be used or cited as precedent by other Sec. 199A regulations or other defini- generally uses for cryptoassets) is a
taxpayers, the conclusion in this ruling tions in the tax law for Sec. 1202 pur- digital representation of value that is
does provide some insight into the IRS’s poses, especially where those analogous not a representation of U.S. or foreign
approach to the definition of “brokerage definitions conflict with or narrow the currency and that functions as a me-
services.” Corporations that primarily ar- plain dictionary definitions of a term. dium of exchange. Convertible virtual
range transactions between other parties From Evan Adams, J.D., LL.M., currency is virtual currency that has an
may still be engaged in a qualified trade Washington, D.C. equivalent value in real currency or acts
or business, depending on the specific as a substitute for real currency. Bitcoin,
facts of the situation. It appears to be a Recent IRS guidance on which was introduced in 2009, is com-
helpful fact if the intermediary remains cryptoassets monly recognized as the first convert-
involved after arranging the transaction, The global cryptoasset market capital- ible virtual currency. IRS guidance on
to provide services to one or both of the ization is currently approximately $2.75 convertible virtual currencies was not
parties to the transaction it arranged. trillion, and this figure is speculated released until 2014.
On the other hand, an intermediary that to grow as cryptoassets become more In 2014, the IRS issued Notice
concludes its service once the transac- widely adopted. The IRS has released 2014-21, which adopts the principle
tion is consummated will have a harder limited guidance to date on the tax that, for federal income tax purposes,
time arguing that it is not engaged in consequences of cryptoasset transactions, virtual currency is not currency and
brokerage services. and many issues currently remain unad- is treated as property. The notice, in
Letter Ruling 202114002 may also dressed. Many of these matters will no the form of 16 FAQs, outlined how to
provide some insight into the IRS’s doubt be clarified in the future. In the compute the basis of virtual currency
approach to interpreting the other cat- meantime, this item summarizes IRS and how to determine the character of
egories of businesses that are excluded guidance on cryptoassets, including the the gain or loss. It also alerted taxpayers
from the definition of a qualified trade latest releases from the Service. of penalties they could be subject to for
or business. In determining whether the It should be noted that Congress in- failure to comply with the tax laws.
corporation was engaged in brokerage cluded certain cryptoasset provisions in In 2019, the IRS expanded on guid-
services, the IRS ignored definitions the Infrastructure Investment and Jobs ance from 2014 and released Rev. Rul.
of the term in other areas of the tax Act, P.L. 117-58, enacted in November 2019-24 and additional FAQs to assist

20 February 2022 The Tax Adviser