On December 6, 2023, The Hill published an op-ed written by ATR’s Director of Financial Policy, Bryan Bashur. The article talks about the flaws in a proposed rulemaking that the IRS issued to regulate tax reporting of digital asset transactions (e.g., stablecoins, nonfungible tokens, and other cryptocurrencies). Bashur explains that:
Last month, the IRS closed the comment period on a proposed rule for certain digital asset brokers, including digital asset trading platforms, wallet providers and payment processors. The rule, if finalized, would require these entities that fall under the rule’s definition of a broker to submit information to the IRS on their customers’ digital asset transactions.
While requiring brokers to report transactions to the IRS is conventional, the rule goes beyond congressional intent. Bashur shows this by describing how:
For example, the IRS offers an expansive definition of digital asset, which includes stablecoins and nonfungible tokens, or NFTs, many of which never realize a capital gain or loss. What is most concerning is that if an individual uses a stablecoin to purchase coffee, groceries or any everyday good or service, the IRS is mandating that transaction be reported, for he IRS’s rule also fails to offer a de minimis exemption for small transactions.
Last Congress, a bipartisan cadre of lawmakers introduced a bill to ensure that small digital asset transactions need not be reported to the IRS. After all, overreporting will lead to more government surveillance and paves the way for the IRS to harass individuals and small businesses.
This is not the first time the IRS has attempted to push the boundaries of their authority. For example:
The IRS tried to lower the reporting threshold to $600 for bank account transactions, which would have significantly burdened small businesses and individuals with onerous and invasive reporting requirements. Additionally, Congress wrongly directed the IRS to lower the threshold for third-party network transactions from $20,000 to $600.
The IRS was unsuccessful with bank accounts, so now they are going after taxpayers’ digital asset transactions.
The IRS is also targeting decentralized protocols:
The proposed rule also targets decentralized protocols run by decentralized autonomous organizations. These peer-to-peer operations are different from centralized exchanges because they do not have the knowledge or information required to report transactional information to the IRS.
The IRS did not thoroughly examine the marketplace before issuing the proposed rule:
The IRS admits that it did not thoroughly study the economic effects of this rule on small businesses. According to Michigan v. EPA, “No regulation is ‘appropriate’ if it does significantly more harm than good.” In this case, the IRS is fixated on terminating “the overall tax gap” to the detriment of small businesses with no perceived benefits.
Fortunately, Congress has introduced legislation that would codify fixes for reporting digital asset transactions:
The Keep Innovation in America Act should be enacted to fix the statutory definition of a digital asset broker. The bill would codify a better definition of broker for digital asset transactions, tailor the definition of digital asset and narrow the information reported to the IRS.
Bashur concludes by stating that:
Lawmakers should understand the negative implications of allowing the IRS to collect innumerable amounts of transactional information on digital assets. Congress needs to take the reins and pass legislation that would codify the proper definition of a broker and protect consumers by statutorily exempting small transactions from IRS reporting.
In the meantime, the IRS should withdraw the unworkable rule since it fails to capture Congress’s intent and could be found to be arbitrary and capricious.
Click here to read the full op-ed.