Americans for Tax Reform continues to support legislative efforts to fix the overly-broad definition of a digital asset broker as passed in the Infrastructure Investment and Jobs Act (P.L. 117-58). As the end of the 2022 approaches, the lame-duck session will be the perfect opportunity to attach a provision to the imminent omnibus bill to ensure that crypto miners, validators, wallet providers, and software developers are not compelled to report transaction information to the Internal Revenue Service.
Although the Treasury Department, which is the parent agency to the IRS, indicated that “ancillary parties” are not intended to report transaction information, new leadership at Treasury could easily reverse course.
The only surefire solution is to explicitly codify the clarification that non-brokers are not required to report transaction information to the IRS.
The reporting requirements, as enacted in last year’s infrastructure bill, apply an incongruent framework to digital assets. The requirements are so broad that they would rope in validators, miners, wallet providers, and software developers because they are “effectuating transfers” of digital assets. Although individuals should pay the taxes that they owe, the new approach “attempts to apply the existing cost basis reporting framework used for stocks and securities to digital assets, despite the fact that there are significant differences between the digital asset ecosystem and the stock and securities markets.”
Individuals could be required to report “the name and address of the parties” and a transaction’s “gross proceeds” even if they are not brokers and do not possess this information. This is especially true for peer-to-peer transactions along decentralized finance protocols.
To address these concerns, both the House and the Senate have introduced bills to fix the broad definition. Rep. Patrick McHenry (R-N.C.) introduced the bipartisan Keep Innovation in America Act (H.R. 6006) and Sen. Pat Toomey (R-Pa.) introduced a similar bipartisan bill (S. 4751) in the Senate. Both bills would amend statute by clarifying that software developers, miners, validators, and wallet providers would not be required to report digital asset transaction information to the IRS.
Both political parties are concerned with the possibility that America will be sidelined in the coming age of digital asset innovation. The flaws in the infrastructure bill are so broad that members of both parties have signaled that it will force entrepreneurs and innovators to take their investments and expertise overseas and render the United States a passive observer, rather than the key facilitator of new technologies.
Rep. Kevin Brady (R-Texas) explained the situation best by noting that H.R. 6006 will ensure that the cryptocurrency reporting requirements are “meaningful and effective,” rather than just rendering the whole industry vulnerable to the IRS now wielding “untested, blunt instruments.”
ATR President Grover Norquist applauded the introduction of H.R. 6006 when it was introduced last year:
I am proud to support Ranking Member McHenry’s bill that will significantly improve the digital asset reporting requirements recently enacted in President Biden’s infrastructure package. The Infrastructure Investment and Jobs Act imposed burdensome reporting requirements on virtually every participant within the cryptocurrency ecosystem, including miners and software developers, and impinged on consumers’ privacy. McHenry’s bill, the Keep Innovation in America Act, strengthens privacy protections, and limits which individuals would be required to submit tax return information to the IRS. This bipartisan legislation will significantly improve the status quo and should be swiftly passed into law to preserve the United States’ position as a global leader in the innovation of digital assets and blockchain technology.
After the midterm elections, Congress will likely consider an omnibus bill that will include various legislative priorities from House and Senate members. The omnibus bill (which will pass both the House and the Senate in one form or another) would be the perfect legislative vehicle to pass a provision to fix the overly broad statute. The copious bipartisan support for a legislative fix makes H.R. 6006 and S. 4751 perfect candidates for inclusion in the year-end omnibus package.
Members of Congress should act swiftly and codify these clarifications to the reporting requirements to alleviate compliance burdens on the various players in the crypto industry.