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Biden Administration Proposes Harsh Crypto Tax Reporting Rules
The proposed rules are a clear case of regulatory capture and overreach, and would impose almost impossible burdens on some crypto businesses.
Regulation from the US Treasury Department has been proposed. The rules would require cryptocurrency brokers—including payment processors and both centralized and decentralized exchanges—to provide information about users' digital asset transactions to the Internal Revenue Service (IRS). These regulations would impose a harsh burden on affected organizations, and are regarded as unworkable by many in the industry.
The new regulations would not come into force until 2025, for the 2026 tax filing season. The initiative proposes the introduction of a new tax reporting form, Form 1099-DA, which would be sent to both users and the IRS.
The form is intended to help taxpayers determine what they owe, and avoid the kind of extensive and difficult calculations that are often required when processing many crypto trades. The measure would bring digital asset brokers under the same purview of information reporting rules that are applicable to brokers who deal with traditional financial instruments, such as stocks and bonds.
One of the most controversial aspects of the proposal is the definition of the term "broker", which includes both CEXs and DEXs, crypto payment processors, and potentially even certain online wallets. The rules encompass popular coins and tokens, and NFTs.
The proposed regulation is part of a set of measures intended to close the so-called tax gap, which are forecast to raise around $28 billion over ten years. At present, crypto users are required to report their own gains and losses on trades. The platforms on which they trade are not expected to provide that information to them, meaning there is scope for inaccuracy (and fraud).
However, the rules have been slammed by DeFi experts. Miller Whitehouse-Levine, CEO of the DeFi Education Fund, commented: "Today's proposal from the IRS is confusing, self-refuting, and misguided. It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don't exist."
Adam Cochran comments in a tweet thread: "This isn't just heinous overreach. This is a failure to fundamentally understand the technology. It's like requiring every browser company to get a postmaster license because they deal with email..."
Interestingly, he argues that this is not a part of Operation Choke Point 2.0 (OCP 2.0), which has sought to shut crypto businesses off from mainstream financial services. "It's regulatory capture; because brokerages will be able to offer services through walled gardens that defeat the entire point of a decentralized system. This Treasury administration is attempting to declare that viewing or broadcasting public information, without custody, profit, or control of that information, makes you a broker. That's about as close to 'thought crime' as you can get."
The Treasury Department and IRS will accept feedback on the proposal until October 30, and will hold public hearings on November 7-8.
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