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    Cryptocurrency Group Files Lawsuit Challenging Digital Asset Reporting Rules

    A provision of the 2021 bipartisan Infrastructure Investment and Jobs Act, P.L. 117-58, is being challenged in court by crypto company Coin Center as “unconstitutional financial surveillance.” In addition to requiring broker reporting, the law requires both businesses and individuals who receive $10,000 or more in digital assets to report the name, date of birth and Social Security number of person who made the transfer to the IRS. This requirement is set to take effect in 2024.

    Lawsuit Allegations

    Coin Center’s 71-page complaint, filed in June in the U.S. District Court for the Eastern District of Kentucky, alleges that the amendments to Code Sec. 6050I made by the Infrastructure Act violate the First and Fourth Amendments to the Constitution. Coin Center has two major claims against the reporting requirement:

    (1) It forces ordinary people to collect highly intrusive information about other ordinary people and report it to the government without a warrant and is thus unconstitutional under the Fourth Amendment’s ban on unreasonable search and seizures.

    (2) It demands that politically active organizations create and report lists of their donors’ names and identifying information to the government, which is unconstitutional under the First Amendment’s grant of freedom of association.

    Coin Center says the provision cannot be fixed by regulations, so the group is seeking an injunction against enforcement of the reporting mandate by Treasury and the IRS. The government had not filed an answer as of mid-July.

    Cash Reporting v. Cryptocurrency Reporting

    The effect of the reporting rule is to treat digital asset transfers in the same way as physical currency transfers. Cash transfers of $10,000 or more must be reported to the IRS by businesses and financial institutions under the Bank Secrecy Act; however, Coin Center argues that because cryptocurrencies are kept on a public ledger, reports to the government about identifiable cryptocurrency transactions could provide a window into participants’ full transaction histories. While the public ledgers do not reveal otherwise private information about senders and recipients, the reporting regime could result in someone being able to connect a cryptocurrency address to the real name of the person using it.

    Proposed Fix Uncertain

    Some members of Congress want to see changes to the reporting requirement before it takes effect. H.R. 6006, introduced by Rep. Patrick T. McHenry (R-NC), delays broker reporting until 2026, removes the treatment of digital assets as cash and instead requires a report to Congress on the treatment of digital assets as cash for reporting purposes. McHenry is leading a bipartisan group of legislators seeking a fix for the Infrastructure Act provisions, an effort that started just a week after the law was enacted.

    Despite this effort, Congress watchers know that once a provision has been enacted, it is difficult to get a legislative change. Meanwhile, the Biden Administration and Treasury Department are moving ahead with plans to further regulate cryptocurrency. President Biden issued an Executive Order in March laying out a national policy for digital assets. More recently, the Treasury Department issued a fact sheet containing a framework for “international engagement” on digital assets. In moving ahead, Treasury said it is focused on the following core values:

    • Consumers, investors and businesses are protected.
    • Appropriate global financial system connectivity, in addition to platform and architecture interoperability, is preserved.
    • The safety and soundness of the global financial system and international monetary system are maintained.

    Outlook

    The reporting and taxation of digital currency transactions will continue to evolve with technology and markets. Taxpayers can expect more changes going forward, but for now, it is important to plan for compliance with the 2024 digital asset reporting rules.

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