Consensys Requests Delay In IRS Crypto Reporting Regulations

Blockchain development firm Consensys formally requested the U.S. Internal Revenue Service (IRS) on June 21 to delay the implementation of proposed tax regulations requiring cryptocurrency brokers and exchanges to report digital asset transactions.

The Proposed IRS Crypto Regulation and Form 1099-DA

Consensys sent a letter to ask for a delay

in IRS crypto regulation, following the proposed tax regulation that was introduced in August 2023 to treat crypto brokers like traditional brokers of stocks and bonds. Under these rules, entities defined as brokers would be required to file Form 1099-DA for specific crypto transactions.

Consensys expressed concerns that the regulations “do not sufficiently consider the burden on the would-be broker, which currently includes entities that do not traditionally have any reporting obligations.”

Another draft form that was published in April 2024 sparked controversy within the industry due to its broad definition of what constitutes a “broker.”

The IRS draft form lists various types of brokers, including kiosk operators, digital asset payment processors, and both hosted and unhosted wallet providers.

Consensys criticized this draft form for lacking clear instructions and potentially leading to multiple parties reporting the same transaction.

Just now, @Consensys commented on the #IRS's draft Form 1099-DA to provide our perspective that the information required under the proposed regulations and on the Draft Form is overly broad and imposes a costly compliance burden, particularly for a #blockchain software provider.… pic.twitter.com/B36XLhr1Qc

— Bill Hughes : wchughes.eth 🦊 (@BillHughesDC) June 20, 2024

Also reacting to the draft, Ji Kim, chief legal and policy officer at the Crypto Council for Innovation, called the inclusion of unhosted wallet providers “unfortunate,” arguing that such entities lack knowledge of transaction details and the parties’ identities.

The IRS released a draft Form 1099-DA for reporting "Digital Asset Proceeds from Broker Transactions": https://t.co/NSSu8prl4X

As a refresher, this is the form that "brokers" will start using in 2025 to report digital asset transactions to customers. This is a draft form…

— Ji Kim (@_jikim) April 19, 2024

Meanwhile, Consensys has also highlighted privacy concerns and the limited time frame for compliance before the upcoming tax filing deadline.

The company warned that making it mandatory for blockchain developers to be classified as brokers to complete the 1099-DA form manually could “single-handedly destroy U.S. companies that publish blockchain user interfaces like self-custody wallets.”

While there have been no high-profile legal cases between crypto exchanges and the IRS over tax evasion to date, the proposed regulations could signal an increased focus on ensuring proper reporting of taxable crypto activities.

Previous Regulatory Challenges Featuring Consensys and the SEC

The cryptocurrency industry in the United States is becoming complex, with regulatory challenges extending beyond tax reporting to securities law considerations.

Consensys exemplifies this complexity in its ongoing interactions with both the IRS and the Securities and Exchange Commission (SEC).

On June 19, the SEC dropped its investigation on Ethereum’s security status, as the regulatory body revealed that it would not bring charges alleging Ether’s sales as security.

It was reported that Consensys is moving forward with the SEC lawsuit, despite Consensys Co-Founder Joseph Lubin cautiously welcoming the decision by characterizing it as a potential shift away from what he termed “guerrilla tactics” in crypto regulation.

The legal action, initiated in response to a Wells Notice concerning the company’s MetaMask wallet service, shows regulatory uncertainties plaguing the digital asset sector.

Our fight continues. In our lawsuit, we also seek a declaration that offering the user interface software MetaMask Swaps and Staking does not violate the securities laws. It should not take a lawsuit to provide the much-needed regulatory clarity to allow an industry that serves…

— Consensys (@Consensys) June 19, 2024

Consensys argued that the investigation was unwarranted, citing Ethereum’s declaration as a commodity in 2018 and the recent SEC approval of spot Ethereum ETFs.

The company’s stance reflects the larger crypto sentiment that crypto regulation must be more transparent and consistent.

The legal tussle between Consensys and the SEC parallels the challenges posed by the IRS’s proposed reporting requirements.

The lack of clear guidelines on reporting various crypto activities, combined with the broad definition of “brokers” in the IRS’s proposed regulations, creates a challenging environment for crypto companies and individuals.