After facing significant resistance from the cryptocurrency industry, the Internal Revenue Service (IRS) conducted a public hearing on Monday morning. The primary focus of the discussion was the recently proposed regulations concerning the reporting responsibilities of digital asset brokers.
A firestorm of comments
Initially submitted on August 29th, 2023, the IRS’s proposed regulations have become a focal point of controversy, attracting nearly 125,000 comments as of Monday, November 13th. Supporters argue that the proposed regulatory framework would facilitate accurate accounting and taxation of cryptocurrencies. Conversely, critics contend that these regulations could have adverse effects on the cryptocurrency sector by jeopardizing consumer privacy and expanding government oversight.
Over-reporting and overreach
The proposed regulation has faced criticism for its broad definition of the term “broker,” encompassing “a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services.” Detractors argue that this definition is overly vague, potentially encompassing a wide array of entities under the same umbrella.
A comment from the DeFi Education Fund expresses concern, stating, “The Proposed Regulations interpret the term ‘broker’ to include ‘digital asset middleman,’ a vague and expansive category of market participants that bears little resemblance to the persons historically considered brokers.”
Another critical comment, originating from Americans for Tax Reform, highlights the IRS’s emphasis on obtaining customers’ personally identifiable information (PII) and ensuring accurate tax reporting, expressing concern about the potential costs of over-reporting. This critique suggests that the IRS’s focus on detailed reporting goes beyond what is traditionally required of conventional brokers.
“An existential threat to the future of crypto”
In addition, participants in the crypto space argue that introducing an intermediary goes against the fundamental principles of DeFi (Decentralized Finance) technology. They contend that the absence of a third-party intermediary is crucial to the essence of peer-to-peer technology.
Michael D. Bodman, the founder and president of Open Source Ventures, asserts, “There is no sound reason for Treasury and the IRS to label an imaginary middleman and force that imaginary middleman to report decentralized finance trades and cost-basis tax information. There is no middleman in decentralized finance protocols, hence the innovation and value of the technology.”
Carlo D’Angelo, a witness and crypto criminal defense attorney, shared his concerns on Twitter, emphasizing that if the proposed regulations are approved in their current form, they could significantly impede the growth and innovation in the digital asset sector. He further stressed that the proposed regulations could pose an existential threat to the future of crypto and DeFi in the United States.
The anticipated introduction of the 1099-DA form next year marks the initiation of more comprehensive regulatory oversight in the crypto community. The impact of the comments on the regulatory proposal remains uncertain.