{"id":14487,"date":"2021-09-15T21:30:00","date_gmt":"2021-09-15T21:30:00","guid":{"rendered":"http:\/\/ci028d4fb67000269e"},"modified":"2025-01-29T14:14:30","modified_gmt":"2025-01-29T14:14:30","slug":"the-proposal-to-regulate-digital-asset-transactions-should-be-struck","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/business\/the-proposal-to-regulate-digital-asset-transactions-should-be-struck","title":{"rendered":"The Proposal To Regulate Digital Asset Transactions Should Be Struck"},"content":{"rendered":"
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The following article was previously published by Tax Notes, and has been republished here with permission.<\/em><\/p>\n

An overlooked provision in the Senate-approved infrastructure bill1<\/a><\/sup> would dramatically expand the government\u2019s surveillance of Americans\u2019 economic activity and diminish America\u2019s role in developing an important new technology. The amendment to section 6050I<\/a> of the tax code should be struck when the bill is taken up in the House. If it\u2019s too late for that, it should be promptly repealed.<\/p>\n

Beyond its impact on the liberty and dignity of U.S. citizens, the provision targets a misunderstood set of new technologies \u2014 broadly, \u201cdigital assets\u201d \u2014 and it would damage U.S. leadership in finance and technology.<\/p>\n

In a broad range of situations, the proposal would require Americans to collect and report to the government the Social Security number of persons from whom they receive digital forms of monetary value \u2014 along with that payer\u2019s name, birth date, address, profession, and reason for the transaction. It does this by adopting wholesale the reporting regime that applies to the in-person receipt of large amounts of physical currency.<\/p>\n

The applications and consequences of the proposed law are difficult to summarize, or even to confidently list, because of the mismatch between the new technology being regulated and the old law that is being repurposed to expand government surveillance. This old law concerns the centuries-old technology of physical coin and paper currency, and it primarily governs face-to-face transactions involving more than $10,000 in cash.<\/p>\n

The section 6050I<\/a> proposal would impose onerous surveillance and reporting duties on all Americans, with fines or prison for those who fail (or perhaps are unable) to comply.2 <\/sup>Nominally, the subject of the regulation is \u201ccash,\u201d but it\u2019s not really cash that\u2019s being regulated; it\u2019s people.<\/p>\n

Simply put, the new provision has no place in a free society. But in any case, those who would support the new law should be required to argue for it in the cold light of day. A momentous imposition on Americans\u2019 financial affairs \u2014 one that will also affect the evolution of a major and still-nascent technology in which the United States may already be losing its leadership role \u2014 should not be quietly tucked into a must-pass spending bill under the guise of offsetting a tiny fraction of its trillion-dollar price tag.<\/p>\n

A Modest Proposal for Government Surveillance<\/h2>\n

To appreciate the proposed revision to section 6050I<\/a>, it helps to take a bird\u2019s-eye view of the government\u2019s initiatives to monitor the flow of money among citizens. The surveillance and reporting of Americans\u2019 financial activity is defended largely as a practical necessity to reduce the underreporting of taxable income and to help fight crime. The status quo has expanded piecemeal over the decades and is spread through different laws and regulations. Critically, most of this surveillance and reporting takes place behind the scenes, beyond the day-to-day experience of most Americans. It has been outsourced to intermediaries such as banks, employers, and the various \u201cbrokers\u201d that are defined in terms of their obligation to report third parties\u2019 tax-relevant financial information to the government.3<\/a><\/sup><\/p>\n

To understand how the government does, and might, keep tabs on taxpayers in order to maximize its tax receipts, it\u2019s helpful to start with an extreme but hypothetical reporting regime, and then back away to get closer to the present reality. Imagine a very simple system designed to help the government make sure everyone pays their taxes:<\/p>\n

Each time any person receives money, the recipient must report the incident to the government.<\/p>\n

In this hypothetical system of complete financial surveillance, \u201cany person\u201d means what it says (and includes businesses or other entities). \u201cReceive\u201d means, take possession for any reason. \u201cReport it\u201d means, first, to verify the payer\u2019s name, birth date, address, profession, and Social Security or tax ID number. Then, to promptly send that information \u2014 along with the amount received and the reason for the transaction \u2014 to the government on a form signed under penalty of perjury.<\/p>\n

I hope this proposal strikes you as outrageous, not merely as absurd and impossible to implement as a practical matter. But from here on out, I will focus on the practical implications of the government\u2019s methods of surveillance. The implications for Americans\u2019 rights and interests in living free and private lives are left to the reader.<\/p>\n

One reason it would indeed be absurd for the government to demand a report of every monetary transaction is that the government already has<\/em> pretty good access to much of the data that the hypothetical regime would produce. As we debate how much paperwork and surveillance Americans should tolerate in the name of increased tax revenue, it\u2019s important to be upfront about the status quo. Proponents of new surveillance measures to keep up with technology will argue that the die has already been cast. But when new technologies increase the collateral consequences of more surveillance and reporting, it\u2019s time to ask when enough is enough. Not all measures can be justified by a promise of increased tax receipts, and certainly it is wrong to proceed without informed public debate.<\/p>\n

Back to our hypothetical surveillance regime. In light of how things work under the system already in place, it\u2019s not hard to see why reporting every<\/em> financial transaction is overkill. The government doesn\u2019t need citizens to report every receipt of money because today most money moves through financial intermediaries such as banks. Banks keep good records. They\u2019re required to. They have your name, birth date, address, and tax ID number on file, and your data is linked to every bank transaction you\u2019re involved with. Banks (and other financial intermediaries such as \u201cbrokers,\u201d the subject of the separate, much-discussed digital asset reporting provision in the infrastructure bill) are already required to inform the government when something notable happens with money you\u2019re sending or receiving. And even if nothing triggers a reporting requirement, banks are ready to share even your boring data with the government when asked. They\u2019re also free to report anything they deem suspicious, even if they\u2019re not required to.4<\/sup><\/p>\n

So requiring all<\/em> transactions to be filed with the government is already unnecessary, because much of that is already taken care of by banks. What\u2019s left that might require monitoring?<\/p>\n

Section 6050I<\/a> And Old-Fashioned Cash<\/h2>\n

Most money moves through banks, but not all of it. Physical cash still exists. I can hand you $100 \u2014 or even $1 million \u2014 without involving a bank. The government does not like this, of course, because it might not learn who received what from whom. So there are rules governing the use of cash. Many Americans don\u2019t know about these rules because, the way the world now works, the rules don\u2019t actually seem to affect their daily lives. Plus, the rules themselves have helped push cash to the fringe of the economy. Americans still use small amounts of cash, and of course the poor and unbanked use cash a lot, but that\u2019s tolerated despite occasional calls to further reduce the use of physical currency to increase surveillance.5<\/sup><\/p>\n

Arguably, and more charitably, the reason many Americans don\u2019t know about the laws regulating their use of physical cash is that those rules were indeed drafted, debated, and enacted following Congress\u2019s respectful study and recognition of how Americans actually live and go about their economic lives as citizens whose prosperity, autonomy, and liberty are the very goals of good government. On this argument, the well-considered cash rules minimize the law\u2019s intrusion on typical taxpayers\u2019 private affairs in a well-struck balance with fighting crime and tax fairness. But no similar argument can be made about the proposed tax provision\u2019s impact on Americans who might use digital assets. There has been no exploration of how this would affect Americans who wish to use digital assets, and there has been no debate.<\/p>\n

Cash still exists, but now there is a new way for me to hand you monetary value without involving a bank or other intermediary. For simplicity, and following the proposed tax provisions, we\u2019ll call this technology \u201cdigital assets.\u201d The details of this technology are indeed important, and lawmakers especially would do well to better understand them. Unfortunately, what governments understand best about digital assets is the fact that, like a paper $100 bill, I can give you a digital asset without using a bank or other financial institution. And that means that the government might not hear about it.<\/p>\n

As we\u2019ll soon see, old rules restricting the use of cash are the foundation for the new proposal to expand economic surveillance and reporting. If all you care about is tracking every taxpayer\u2019s receipt of money, physical cash and digital assets indeed look a lot alike: All you will notice is that, with both forms of monetary value, the government might not learn about it when you receive some.<\/p>\n

So governments are inclined to think the use of digital assets, like the use of cash, should be regulated and even discouraged. And indeed, the proposal to amend section 6050I<\/a> does just that, purporting to treat physical cash and digital assets exactly the same. These short amendments to the tax code literally redefine the \u201ccash\u201d that must be reported to include \u201cany digital representation of value which is recorded on a cryptographically-secured distributed ledger or any similar technology as specified\u201d by the Treasury secretary.6<\/sup><\/p>\n

But physical cash and digital assets aren\u2019t used in the same ways, so the proposal to lump them together under the statute does not treat them (or the humans that use them) the same. One of them is bulky and using it without the help of a regulated financial intermediary typically requires the payer and the recipient to meet face to face. The other is weightless and can zip anywhere in the world in the blink of an eye. Painting them both with the same brush under section 6050I<\/a> fails to understand or respect how digital assets are (or might be) used and what makes them an innovation to begin with.<\/p>\n

In 1970 Congress began to crack down on the use of cash to fight money laundering. The Bank Secrecy Act required banks to report large cash transactions to the Treasury.7<\/sup> The threshold for reporting was set at $10,000, which would translate to about $65,000 in today\u2019s dollars.<\/p>\n

In 1984, this time with the stated goal of increasing tax compliance, Congress added a similar provision to the tax code. Subject to a few limitations, section 6050I<\/a> requires \u201cany person\u201d who \u201creceives\u201d more than $10,000 in cash in any transaction to report the event to the IRS. This entails filling out Form 8300, signing it, and mailing it to the IRS within 15 days. (Today, there\u2019s an option to file the report online with FinCEN\u2019s Bank Secrecy Act E-Filing system.) The government estimates it takes 21 minutes to fill out a Form 8300.8<\/sup> Penalties for unreported or misreported Forms 8300 can be as little as $50, for missing the 15-day reporting deadline but curing the mistake within 30 days.9<\/sup> \u201cIntentional disregard\u201d for the law can result in fines of up to $100,000; willful violations can result in prison time.10<\/sup> Other penalties apply for failing to send an annual statement by January 31 to each person you reported during the previous year.11<\/sup><\/p>\n

<\/figure>\n

To complete a Form 8300, the recipient of the cash is required to verify<\/em> the payer\u2019s identity,12 <\/a><\/sup>and must also report the payer\u2019s business or profession and the nature of the transaction. The required information includes the payer\u2019s Social Security or tax ID number. Apparently, requiring the disclosure of one\u2019s Social Security number to one\u2019s counterparty as a condition of transacting more than $10,000 was not something that raised concerns among lawmakers in 1984 when they enacted section 6050I<\/a>. But at least the requirement was practically feasible, as the exchange of money and personal information was likely face to face. This also made feasible the Treasury\u2019s requirement that, if the payer claims to be an alien, the recipient must \u201cexamine such person\u2019s passport, alien identification card, or other official document.\u201d13<\/sup><\/p>\n

The only \u201cpersons\u201d exempted from the requirement to file Form 8300 are \u2014 wait for it \u2014 banks and other financial institutions.14<\/sup> That does make sense because these institutions already have a similar requirement to report large cash transactions under the Bank Secrecy Act. But this asymmetry leads to an absurdity that highlights the indefensible rush to enact this substantive law as a part of a spending bill.<\/p>\n

In late 2020 the Treasury proposed to amend, on an expedited timeline, the Bank Secrecy Act regulations for reporting large cash transactions to include transactions in digital assets.15<\/sup> Following thousands of public comments on this and other proposed regulations, the proposal was slowed to allow further consideration.<\/p>\n

That Treasury provision would apply only to financial institutions, not to the \u201cany person\u201d addressed in the new tax proposal. It\u2019s good that the hasty Treasury proposal was slowed. But the result is that financial institutions would be exempt from section 6050I<\/a>\u2019s new reporting requirement under existing law, while you and I are not. If the Treasury\u2019s proposal deserved further review before being imposed, then this far broader proposal certainly does.<\/p>\n

To require reporting, the receipt of cash must be in the course of the recipient\u2019s trade or business, but this limitation does not provide the safe harbor some might expect. Typically, a \u201creceipt\u201d of money does occur in the course of trade or business. The tax code does not actually define \u201ctrade or business,\u201d requiring us to look to case law to determine what gain-seeking activities are adequately considerable, regular, and continuous16<\/sup> to trigger the statute.<\/p>\n

Importantly, the requirement of a \u201creceipt\u201d has nothing to do with taxable income, or even revenue, or even the recipient\u2019s right to keep the money: It\u2019s simply the receipt<\/em> of cash that triggers the statute. Receiving cash on behalf of someone else requires the recipient to report it.17<\/sup><\/p>\n

The regulations make clear that the meaning of \u201ctransaction,\u201d that is, \u201cthe underlying event precipitating the payer\u2019s transfer of cash to the recipient,\u201d is extremely broad. Here\u2019s the partial list from the regulation18<\/sup>:<\/p>\n

\u201cTransactions include (but are not limited to):<\/p>\n