US Appellate Court Directs Lower Court to Consider (Some) Constitutional Challenges to Digital Asset Reporting

Since the 1970s, the US has required certain banks and other financial institutions to report cash transactions of more than $10,000 under the Bank Secrecy Act (contained in Title 31 of the United States Code).

In 1984, Congress enacted Section 6050I of the US Internal Revenue Code (contained in Title 26) to require reporting by any taxpayer who, in the course of a trade or business, receives more than $10,000 in cash in one or more related transactions, subject to certain exceptions (e.g., if the reporting is duplicative of reporting under Title 31). In 2021, Congress amended Title 26 (and not Title 31) to extend the definition of “cash” to include digital assets. Title 26 prescribes civil and criminal financial penalties (up to $132,500 in 2024, as adjusted for inflation) for failure to report, and felony criminal prosecution for wilful failures to report. The form used for this purpose is Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, which requires disclosure of sensitive information about relevant cryptocurrency users.

In June 2022, a group of taxpayers (the “Taxpayers”) sued the US government after the Infrastructure Investment and Jobs Act (2021) amended Section 6050I by adding digital assets to the list of assets that must be included when determining whether cash received has a value in excess of the $10,000 reporting threshold for reporting purposes.

The complaint raised constitutional challenges against the law and its enforcement. The Taxpayers alleged they would engage in at least some transactions that require Section 6050I reports and that such reporting would damage them.  For example, there would be increased costs for completing reports, tracking transactions subject to the reports, and paying accountants and lawyers to assist with the reporting requirements.

The Taxpayers requested that Section 6050I be declared unconstitutional and its enforcement enjoined. They alleged five distinct constitutional grounds, as follows.

First, Section 6050I violates the Fourth Amendment because taxpayers have a reasonable expectation of privacy in crypto transactions, and the obligation to report personal information of senders and receivers of crypto, and related details about their personal affairs, constitutes an unreasonable search, which should require a warrant.

Second, Section 6050I will curtail the First Amendment right to freedom of association in that there is a requirement to disclose expressive associations (i.e., religious, political, and interest affiliations).

Third, Section 6050I violates the Fifth Amendment because it is vague. In essence, the law was designed to cover physical-cash transactions, and there will be substantial issues with understanding how the law applies to cryptocurrency transactions.

Fourth, Congress exceeded its “enumerated powers” in that Section 6050I is not “necessary and proper” to aid Congress in carrying out its taxing powers, or power to regulate interstate commerce.

Fifth, Section 6050I infringes on the right against self-incrimination.

The United States District Court for the Eastern District of Kentucky ruled the claims non-justiciable (i.e., either the claims were not ripe for adjudication or the Taxpayers lacked standing, or both), and dismissed the lawsuit in its entirety.

In particular, the District Court found that (1) the Taxpayers’ Fourth Amendment privacy claim was not ripe because Section 6050I (as amended) was not yet effective and the US intended to promulgate rules to implement the reporting requirements, and plaintiffs’ theory of harm depended on numerous contingencies, (2) the Taxpayers lacked standing to bring a First Amendment freedom of association challenge and the claim was not ripe because any potential injuries were not imminent or concrete, (3) the Taxpayers’ Fifth Amendment vagueness claim was not ripe because the US was still engaged in rulemaking and a federal court should refrain from interpreting a statute before final agency action, (4) the Taxpayers’ enumerated powers claim was not ripe for the same reasons as in (1), and (5) the Taxpayers’ Fifth Amendment claim of self-incrimination was not ripe because the plaintiffs had not yet asserted a right against self-incrimination. The Plaintiffs timely appealed.

Between the date of the District Court decision and the decision of the United States Court of Appeals for the Sixth Circuit, on August 9, 2024, the IRS issued “transitional guidance” stating that digital assets need not be included in the definition of cash until final regulations are published.   See our post here.  Inasmuch as those forthcoming regulations could narrow or clarify Section 6050I’s scope, the Sixth Circuit held (the decision is here) the Fifth Amendment vagueness challenge was not presently fit for review. It also held Section 6050I does not implicate the Fifth Amendment right against self-incrimination, which could only apply after there was a claim of the privilege in a testimonial (i.e., witness) context.

As to the three remaining constitutional challenges, the Sixth Circuit held that they were presently justiciable (i.e., the claims are ripe for adjudication and the Taxpayers have standing) and subject to constitutional scrutiny.

According to the Sixth Circuit, the Taxpayers could bring a “facial challenge” because the District Court should have accepted as facts that the Taxpayers will engage in some transactions that require Section 6050I reports, such reporting would damage them (regardless of how the law and implementation regulations are applied), and an injunction would prevent the damage. (A facial challenge means that all (or almost all) applications of the law are unconstitutional. These types of challenges are generally justiciable the moment a law is passed.)

The Sixth Circuit further reasoned as follows with respect to each individual cause of action.

First, the enumerated powers claim was ripe the moment Congress passed the “law” and the Taxpayers have standing to sue because the statute imposes costs on the Taxpayers and subjects them to regulations with which they wish not to comply. In other words, no matter how it is applied, at least one of the Taxpayers will be harmed by Section 6050I. Therefore, it is appropriate for the District Court to consider whether the “law” is necessary or proper to carrying out Congress’s taxing power. (The Decision suggests the “law” here refers to Section 6050I, rather than the 2021 Act that amended the definition of cash.)

Second, the Fourth Amendment privacy claim was justiciable because the Sixth Circuit accepted Taxpayers’ argument on appeal that mere disclosure of reports (containing sensitive information) to the government implicates the Fourth Amendment bar on unreasonable searches, regardless of how it is applied. On this basis, it directed the District Court to consider whether the law is reasonable in the light of its statutory purpose or if the information required to be transmitted to the IRS is entitled to Fourth Amendment protection.

Third, the First Amendment right to freedom of association claim was concrete and justiciable because (like the Fourth Amendment claim) mere disclosure of reports containing sensitive information, including religious, political, and interest affiliations, may impede the First Amendment right to freedom of association. Because there is “no question” at least one of the Taxpayers will need to make a Section 6050I report, the Sixth Circuit held it is appropriate for the District Court to consider whether the statute implicates the First Amendment and passes the requisite level of constitutional scrutiny.

In sum, the Sixth Circuit remanded the case to the District Court to resolve whether (1) Congress exceeded its power by enacting Section 6050I, (2) Section 6050I violates the Fourth Amendment bar on unreasonable searches, or (3) Section 6050I violates the First Amendment right to freedom of association.

The Sixth Circuit’s decision also recognized that reporting the receipt of digital assets under Section 6050I could introduce additional complex and confusing reporting requirements for cryptocurrency miners, decentralized exchanges, and transactions involving numerous users, where it would be difficult to determine who is the sender of the asset.   At the same time, Section 6050I’s reporting requirements are similar to other reporting requirements under US law.   Therefore, if the Taxpayers succeed on remand, it is possible that a variety of other reporting regimes might also come under constitutional scrutiny.

In terms of immediate requirements, as noted, the IRS has temporarily suspended the requirement to include digital assets in the calculation of whether the $10,000 threshold is met.  Therefore, businesses, as a rule, are not presently required to report receipt of those assets in order to comply with Section 6050I.