Just 10 years ago, only your millennial, techie cousin had ever heard of, let alone purchased, any cryptocurrency. Fast forward to 2021, and the volume of cryptocurrency transactions has grown to $15.8 trillion.[1] Given the momentous growth in cryptocurrency and other digital asset transactions, it is no surprise that governments are playing catch up in their efforts to regulate and provide guidance in this area. While back in 2014 the Internal Revenue Service (the IRS) issued its first guidance, which it expanded in 2019, 2021 saw increased governmental focus on the industry, particularly in light of the opportunities for tax evasion unique to transactions occurring "on-chain" (i.e., recorded on a blockchain protocol).

In this article, we provide a brief description of how transactions on the blockchain are conducted to illustrate why cryptocurrency and other digital asset transactions have posed significant challenges to tax reporting. We also briefly describe existing IRS guidance on the taxation of digital assets, before describing the more recent enforcement efforts adopted by the United States Congress and the proposals for global enforcement efforts introduced in the United States and globally. We further describe recent legislative authority in Germany, one of Europe's largest economies. As this article highlights, the market for digital assets is pushing governments to address the taxation of this new asset class and to introduce reporting requirements that may require fundamental changes to the way blockchain protocols are written and on-chain transactions are conducted.

I. Background on Bitcoin and other Digital Assets

Bitcoin was introduced to the public in 2008, when one Satoshi Nakamoto uploaded a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" to a mailing list. In it, Nakamoto described an electronic payment system that avoided the need of a trusted financial intermediary to validate transactions. This electronic payment system instead would rely on a network of unrelated users or "nodes" to validate the transactions broadcast to the network. Every transaction on the Bitcoin network contains three pieces of information: (1) the hash of the prior transaction(s) by which the transferee received the subject Bitcoin, (2) the amount of subject Bitcoin to be transferred, and (3) the public address of the transferee. Each node groups together a set of these transactions, forming a "block," and then competes with the other nodes to solve a cryptographic proof. The node that solves the proof first is permitted to add the new block to the chain (thereby earning rewards in the form of additional Bitcoin), and each new block results in a unique hash comprised of the hash of the previous block plus the hash of the transactions in the current block. Consensus occurs when the network of nodes agree that the current block is valid by forming new blocks using the hash of the block just added. By making the information about all prior transactions digitally accessible to every node and rewarding the node that solves the proof with additional Bitcoin, the network incentivizes nodes to add blocks containing only valid transactions. The network does not need to trust the specific node adding the block, it just needs to trust that the overall network of nodes will act properly. Because anyone can run the software and act as node, collusion becomes practically impossible as long as there are sufficient independent nodes.

While the sole function of the Bitcoin blockchain is to validate and record transactions involving Bitcoin, newer blockchains enable more sophisticated transactions by utilizing smart contracts, i.e., code that is programmed to automatically execute if and when the conditions for its execution are met. Ethereum is an example of this newer type of blockchain protocol. While Ethereum, like Bitcoin, uses a native token (ETH) to reward miners for validating transactions, Ethereum also enables the use of smart contracts that allow users to engage in more sophisticated on-chain transactions such as borrowing, entering into derivative transactions, or trading in digital assets that represent ownership of a non-fungible asset, like digital art or access to alternate universes or services. This evolution of blockchain technology and the digital assets transacted and recorded on the blockchain have presented unique regulatory challenges, including in the area of tax compliance.

From a tax perspective, one unique challenge that arises from transactions recorded on a blockchain is that the blockchain technology enables transfers of "value" from one user to another—to engage in transactions that are by their nature "taxable"—without any user having to trust or even know the true identity of any other user. This anonymity increases the opportunities for tax evasion and raises significant enforcement hurdles for a tax system like that of the United States, which is largely based on a system of voluntary compliance.

II. Background Of U.S. Tax treatment

In 2014, the IRS issued Notice 2014-21, providing an application of existing tax laws to virtual currency, including cryptocurrency. In general, virtual currency, defined to exclude any fiat currency, is treated as property under U.S. tax law, and general tax principles applicable to property transactions apply to transactions using virtual currency. In 2019, the IRS issued the first of a series of Frequently Asked Questions, which addressed specific questions relating to various areas such as use of virtual currency as salary for employees, determination of basis and fair market value of virtual currency, and mining activity. A later IRS ruling addressed issues surrounding air drops and hard forks of virtual currency.[2]

III. Development of U.S. Tax Reporting Laws

Historically, the execution of a financial transaction required the participation of a third-party intermediary, such as a commercial bank, credit card company, payment processor, securities broker, escrow agent, etc. Unlike a peer-to-peer cash transaction, which typically involves a simultaneous exchange of goods or services for cash or other, a non-simultaneous exchange among multiple parties that neither know nor necessarily trust each other requires the participation of a financial intermediary to act a trusted third-party to facilitate the exchange.

The financial intermediary generally has to have a direct relationship with each party and, thus, generally has information about each party's identity and the facts regarding the transaction. Given the position of the financial intermediary as the point of contact among the various parties, one common tool to enforce tax compliance is to require the financial intermediary to file information returns that identify to the relevant tax authorities the parties to the transaction and provide details regarding the money, property, and services exchanged. An example of such information reporting is found in section 6045 of the U.S. Internal Revenue Code (the Code), whereby a broker that facilitates a securities transaction is required to file an information return providing identifying information about the buying and selling parties, the selling party's adjusted basis in the securities, any gain or loss from the transaction, and whether the gain or loss resulting from the transfer was short-term or long-term.

While information reporting laws significantly increase tax compliance because the IRS can compare the information reported by a taxpayer with the information reported by the financial intermediary, U.S. taxpayers historically have found ways to avoid being identified as a party to a transaction and, thus, to avoid reporting income from such transactions. Prior to the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010, U.S. taxpayers could avoid being identified as a party to a transaction by "hiding" behind a chain of foreign holding companies organized in low-tax jurisdictions, such as the Cayman Islands. Brokers subject to the U.S. information reporting rules are required to determine whether a party to a transaction is a U.S. taxpayer; however, prior to FATCA (and certain other non-tax laws designed to undermine bank secrecy laws), brokers were entitled to rely on certifications provided on IRS Form W-8BEN to determine that the beneficial owner of income was a foreign person.

The FATCA rules are designed to fill in the compliance gap described above by requiring foreign financial institutions (FFIs) to identify significant U.S. owners of any foreign financial accounts and to report those U.S. owners to the IRS. While such rules only work if FFIs comply with U.S. tax laws to which they are generally not subject, the United States enforces this law by imposing a withholding tax of 30% on payments of certain U.S. source income paid to a foreign account unless the FFI has complied with FATCA's rules. While the payments subject to FATCA withholding have been largely limited to U.S. interest and dividends through various IRS guidance issued since 2010, the IRS has amended its Form W-8BEN by creating a new form for entities—Form W-8BEN-E—whereby each foreign beneficial owner is required to certify as to its FATCA status. Consequently, in any transaction where a foreign beneficial owner is required to provide an IRS Form W-8BEN-E (which in our experience is now almost every financial transaction regardless of its nexus to U.S. tax laws), the financial intermediary would no longer be able to rely on the foreign status of a beneficial owner that has significant U.S. owners. Today there are over 100 countries that have entered into agreements with the United States to require financial institutions within their jurisdiction to comply with FATCA and to exchange information with the United States regarding ownership by U.S. persons of foreign financial accounts. And such information reporting is reciprocal.

Recognizing the important tax compliance function performed by FATCA, the Organization for Economic Co-operation and Development (OECD) developed a similar program—the Common Reporting Standard (CRS)—implemented by participating countries that requires similar exchanges of information regarding beneficial ownership of financial accounts. More than 100 countries have adopted the CRS and, together with FACTA, there is now an almost global agreement to diligence the ownership of financial accounts and to exchange information regarding foreign ownership to the country or countries where such foreign owners are tax resident.

While FATCA and CRS have largely closed the gap in tax compliance and, thus, have limited taxpayers' ability to hide their identities behind foreign entities, the blockchain technology described in Section I above presents a new way to disguise ownership of financial accounts. Unlike FATCA and CRS, however, which made unprecedented changes to global tax compliance, as described further in what follows, the United States and the OECD are considering ways in which to leverage existing rules, including, in the United States, expanding existing information reporting rules, to cover these on-chain transactions and other transactions involving digital assets.

IV. Digital Asset Broker U.S. Reporting Rules

As noted above and previously described by us,[3] under Code section 6045, brokers must file returns with the IRS and provide information about their customers and the transactions they facilitate. A broker is generally defined as a dealer or other person who regularly acts as a middleman with respect to property or services in return for payment. In November 2021, Congress enacted the Infrastructure Investment and Jobs Act (IIJA), which amended Code sections 6045 and 6045A to add "digital assets" to the list of specified securities that are required to be reported by brokers. A "digital asset" is defined in the IIJA as any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary of the Treasury. A "digital asset broker" is defined as any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. As a result, brokers who facilitate the transfer of digital assets, including cryptocurrencies, must comply with the same filing and information reporting requirements that traditional securities brokers historically have been subject to. The amendment becomes effective beginning January 1, 2024. Currently, reporting under sections 6045 and 6045A is done on IRS Form 1099-B, which will likely be modified after public comments to comply with the IIJA's changes to broker reporting requirements.[4]

The IIJA also amended Code section 6050I, effective January 1, 2024, to require persons receiving in excess of $10,000 in cash in the course of their trade or business to file a report providing certain information about the cash receipt. For purposes of that Code section, "cash" includes foreign currency and monetary instruments designated by the Treasury, but now also includes "any digital asset (as defined in section 6045(g)(3)(D))."

V. U.S. Proposal for Expanding FATCA

As described in Section II above, FATCA was designed to achieve greater U.S. tax compliance by combating tax evasion in the form of offshore accounts and investments. In particular, FATCA promotes tax compliance by implementing an automatic exchange of information in relation to U.S. taxpayers between the United States and other participating jurisdictions. FATCA generally requires an FFI to collect and provide substantial information to the IRS regarding its U.S. account holders. An FFI that fails to implement the FATCA reporting rules is liable for U.S. withholding tax on certain U.S. source payments. There is a second, anti-tax evasion device in FATCA under Code section 6038D, which requires U.S. taxpayers to report on all specified foreign financial assets to the extent they exceed, in the aggregate, a certain minimum value.

On March 28, 2022, Treasury published the General Explanations of the Administration's Fiscal Year 2023 Revenue Proposals, also known as the Green Book. In it, Treasury noted that tax evasion involving digital assets was a growing problem and that the global nature of the digital asset market allowed U.S. taxpayers to conceal assets and income using offshore exchanges and wallet providers. Accordingly, Treasury proposed several changes to combat this problem.

As part of an overall enhancement to various reporting requirements, Treasury proposed that brokers, including U.S. digital asset exchanges, report information relating to substantial foreign owners of certain passive entities. The proposal, when combined with existing law, would require a broker to report gross proceeds and such other information as the Secretary may require with respect to sales of digital assets with respect to customers, and in the case of certain passive entities, their substantial foreign owners. The United States would share this information on an automatic basis with foreign partners in order to also receive information on U.S. taxpayers that directly or through passive entities engage in digital asset transactions outside the United States.

Treasury also proposed amending the reporting requirements of Code section 6038D to include a new category of specified foreign financial assets, i.e., foreign digital asset accounts. Thus, taxpayers would be required to aggregate cryptocurrency, financial accounts, and other assets held overseas to determine if they meet the reporting threshold set forth in Code section 6038D. The proposal would cover any account holding digital assets and maintained by a foreign digital asset exchange or asset service provider. The proposal further authorizes Treasury to expand the scope of these accounts under a grant regulatory authority.

VI. OECD Proposal on Crypto-Asset Reporting Framework (CARF)

Also in March of this year, the OECD published a document seeking public comment that introduced changes to the CRS called the "Crypto-Asset Reporting Framework" or CARF. The proposal would require a "Reporting Crypto-Asset Service Provider" (Service Provider) to obtain a self-certification from a "Crypto-Asset User" (User) regarding such User's residence for tax purposes and, if such User is an entity, the residence of any persons who control the User. The Service Provider would also be required to confirm the reasonableness of the information provided by a User that is an entity based on other information collected by the Service Provider, including information collected pursuant to "anti-money laundering" (AML) and "know your customer" (KYC) procedures.

A "Reporting Crypto-Asset Service Provider" is defined as any individual or entity that, as a business, provides a service effectuating exchanges in Relevant Crypto-Assets for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such transactions, or by making available a trading platform. A "Crypto-Asset User" is any individual or entity that is a customer of a Service Provider for purposes of carrying out transactions in Relevant Crypto-Assets. Finally, a "Relevant Crypto-Asset" is any "Crypto-Asset"—i.e., a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions—other than Crypto-Assets used as a means of payment with a Participating Merchant for the purchase of goods or services that can only be transferred by or to the issuer of the Crypto-Asset or a Participating Merchant and that can only be redeemed for Fiat Currency by a Participating Merchant redeeming with the issuer. A "Participating Merchant" is any merchant that has an agreement with an issuer of a Crypto-Asset to accept such Crypto-Asset as a mean of payment.

The OECD's proposal would then require each participating jurisdiction to require Service Providers operating in such jurisdiction to report information about Users to the governing body, which would then exchange information about beneficial owners in other participating jurisdictions with the governing bodies of those jurisdictions. The proposal does not specify who constitutes a Service Provider, including whether such Service Provider must be a legal entity, as opposed to a decentralized autonomous organization (DAO) or a miner, as examples, or whether such Service Provider has to have an actual ability to collect such information about Users.

VII. German Crypto-Currency Rules

On May 10, 2022, after a year of wrangling, the German Federal Ministry of Finance (BMF) published a 24-page letter of explanations on the tax implications of the acquisition, sale/exchange, and use of cryptocurrencies. The BMF letter became effective upon publication and applies to all open cases. Ultimately, the German tax consequences of cryptocurrency transactions depend on whether the cryptocurrencies are held as private assets or business assets. For example, the BMF letter explains that investors who hold their cryptocurrency as private assets can sell it tax-free if a holding period of at least one year (that is, the speculation period) is observed.[5] This one-year period does not apply if cryptocurrency is held as a business asset. The distinction between private assets and business assets is also decisive for acquisitions of cryptocurrency through hard forks or airdrops.

Although the demarcation between private asset investment and commercial trading remains complex and highly fact-specific, the BMF letter provides the following guidance:

Type of Asset/Activity

Tax Treatment

Cryptocurrency held by a German corporation (e.g., a GmbH)

Business asset

Mining (proof of work) and forging (proof of stake), in which block rewards and transaction fees are collected in return for the block creation

German tax authorities regularly assume a commercial activity and the cryptocurrencies used and received are considered business assets.

Block creation

Leads to an acquisition (not a production!) of the asset, which has to be recognized at the market price at the time of acquisition (profit-increasing). Any acquisition costs may only be deducted from the profit when the proceeds from the sale are realized.

Continued purchase and sale of cryptocurrencies

Following German tax law principles that apply to traditional securities and foreign exchange trading, the continued purchase and sale of cryptocurrencies should not be sufficient in itself, even if it is on a considerable scale and extends over a longer period of time, for the assumption of a commercial enterprise, as long as it still takes place in the usual forms, as is the case with private individuals. However, the BMF letter does not address what constitutes a "usual form" of trading in cryptocurrencies among private individuals. This silence leaves continued legal uncertainty and an open area for dispute, especially against the background of the fast-moving nature of trading and massive value fluctuations in the crypto sector that require quick action by the holder.

Staking (without taking over the block creation) as well as, if applicable, the participation in mining and staking pools or a cloud mining service.

May fall within the scope of private asset management. However, the determination will depend on the underlying facts.

Acquisition of cryptocurrencies by private investors in the context of airdrops (as is often the case in the context of marketing campaigns for the launch of virtual currencies).

Received in exchange for consideration: German tax authorities assume there is a tax consequence. In this context, contact details provided in an online form may already be sufficient to constitute consideration. No consideration: The German Federal Ministry of Finance has indicated that it will consider the consequences under gift tax law. As a rule, the value of such free-of-charge airdrops should not exceed EUR 20,000, so that no gift tax should regularly be levied.

With regard to the documentation requirements, the BMF letter offers some welcome simplifications. For example, it is now sufficient for the valuation to provide only one price from one trading platform (e.g., Kraken and Bitpanda) or a web-based list (e.g.,, instead of the average price from three different trading platforms that was still under discussion until now.

Also, it is no longer mandatory to apply the so-called FiFo method, which assumes that those units of cryptocurrency that were acquired first are also those that were used first in the private sale transaction ("first-in-first-out"). The average method can now also be applied. However, the method chosen will then apply on a wallet-by-wallet basis.

Overall, the BMF letter provided welcome guidance, including the possibility of a German tax-free disposal of cryptocurrency for private investors and simplified documentation requirements. However, as in other jurisdictions, many questions remain unanswered. For example, it would have been desirable to have more detailed answers on the German tax authorities' view of the practical distinction between commercial and private asset management. Additionally, the BMF letter does not address whether and to what extent further cooperation and even reporting obligations exist for crypto transactions for the time being. Moreover, it remains to be seen whether later letters will also include explanations on Non-Fungible Tokens (NFTs), Stable Coins (such as Tether or Gemini Dollar), or Decentralized Finance (DeFi).


1. "Cryptocurrency-Based Crime Hit a Record $14 Billion in 2021," Wall Street Journal, Jan. 6 2022,

2. See for a collection of current IRS guidance relating to virtual currency.

3. /resources/insights/211221-new-cryptocurrency-reporting-requirements.

4. After passage of the IIJA, many in the digital asset sector and in Congress expressed concern regarding the very broad nature of the definition of digital asset broker. In response, the U.S. Department of Treasury (Treasury) stated that ancillary parties who cannot access information that would be useful to the IRS are not considered to be digital asset brokers, such as miners and software developers.

5. This was a welcomed position, as, in various preliminary drafts, the German tax authorities still held the controversial view that there would have to be an extension of the speculation period to 10 years for private investors as soon as cryptocurrencies are used as a source of income.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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