The IRS’s “unworkable” digital asset reporting regulations have an “overly broad definition of a digital asset ‘broker,’ insufficient definition of a ‘digital asset,’ and an unreasonably short comment period.” These deficiencies “threaten to prevent a large swath of the digital asset ecosystem from continuing to exist in the United States.” That assessment comes from the Chairman and members of the House Financial Services Committee who, in a letter to Treasury, urged the IRS to reevaluate and adjust its proposed rules.
The regulations reflect changes made by the 2021 Infrastructure Investment and Jobs Act, which requires brokers to report sales and exchanges of digital assets to the IRS and to clients on new Form 1099-DA (The form is not yet available). The law also mandates that both individuals and businesses who receive $10,000 or more in digital assets report to the IRS the name, date of birth and Social Security number of the person who made the transfer. The requirement is set to take effect in 2024, although full implementation will be done in stages from 2024-2026 (Click here for earlier coverage).
Definition of ‘Broker’ Too Broad
The definition of “broker” is too broad and would capture entities that do not possess traditional characteristics of a broker, the letter states. The rules include as brokers digital asset trading platforms, digital asset payment processors and digital asset hosted wallet providers. The Committee Members point out that, under the rules, facilitative services treated as brokers include decentralized finance (“DeFi”) exchanges, when many of these entities only provide information or an interface to allow others to conduct transactions. The House Members also note that Treasury’s expanded definition of “broker” will cause many entities and systems to file duplicative reports.
NFTs and Stablecoins
The Committee believes the IRS’s inclusion of nonfungible tokens (NFTs) as digital assets fails to differentiate between the distinct types of NFTs, many of which are not financial instruments. In addition, treating payment stablecoins as a digital asset investment instrument for tax reporting purposes will “deter their integration into our payment systems and push them into shadow systems,” the Members argue. Stablecoins are cryptocurrencies with a value tied to another currency, commodity or financial instrument to help maintain a stable price over time. Stablecoins are seen by some Members of Congress as a reliable US backed international currency in the future.
Thousands of Comments
The IRS held a public hearing on the proposed rules after receiving over 44,000 comments. Witnesses included representatives from Coinbase Global, Inc., CoinTracker, the Blockchain Association and the National Taxpayers Union Foundation, among others. Most witnesses echoed the Committee’s points that the regulations are too broad and place unreasonable burdens on brokers. In comments and testimony, Marisa Coppel of the Blockchain Association told the IRS that the regulations “introduce overly burdensome or truly impossible requirements for numerous participants.” The Association asked the IRS to reconsider some aspects of the rules and incorporate practical considerations into the new reporting regime.
Coinbase was concerned with the invasion of privacy of investors while the National Taxpayers Union asked the IRS to only tax cryptocurrency users upon cash-out, postpone cryptocurrency taxation regulations until a formal cryptocurrency regulation is promulgated and establish a cryptocurrency sector within the IRS to assist taxpayers with compliance.
Outlook
With this much criticism coming from not only industry and investors, but also from the Congressional Committee responsible for overseeing the digital asset industry, it is hard to imagine that the IRS won’t have to go back to the drawing board on the proposed rules. Expect further revisions before the digital asset regulations are finalized.