IRS Holds Hearing on Digital Asset Reporting Regulations Following Pushback

Following massive pushback from the crypto industry, the Internal Revenue Service (IRS) held a public hearing on Monday morning, chiefly discussing their recently proposed digital asset broker reporting regulations.

A firestorm of comments

Initially filed on August 29th, 2023, the IRS’ proposed regulations have been at the epicenter of controversy, with nearly 125,000 comments listed on the document as of Monday, November 13th. 

Proponents believe the regulatory framework would open the door to accurate accounting and taxation of cryptocurrencies. However, critics argue the proposed regulations would negatively impact the cryptocurrency sector as a whole by threatening consumer privacy and ultimately extending government overreach.

Over-reporting and overreach

The proposed regulation has been criticized for its use of the term broker, which includes “a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services.” Critics argue that the definition is too vague given the wide variety of entities that could be classified under the same umbrella.

“The Proposed Regulations interpret the term “broker” to include “digital asset middleman,” a vague and expansive category of market participants that bears little resemblance to the persons historically considered brokers,” a comment reads in part from the DeFi Education Fund.

“The IRS is so fixated on retrieving customers’ personally identifiable information (PII) and ensuring taxes are properly reported that is ignoring the costs of over-reporting,” states a comment from American for Tax Reform. “This goes beyond what is required of traditional brokers.”

“An existential threat to the future of crypto”

Moreover, players in the crypto space argue that an intermediary is antithetical to the value of DeFi technology, claiming the absence of a third-party go-between is foundational to the peer-to-peer technology.

“There is no sound reason for Treasury and the IRS to label an imaginary middleman and force that imaginary middleman to report decentralized finance trades and cost-basis tax information,” claims Michael D. Bodman, founder and president of Open Source Ventures. “There is no middleman in decentralized finance protocols, hence the innovation and value of the technology.”

“I stressed my concerns that if approved in its current form, these proposed asset reporting requirements significantly burden growth and innovation in the digital asset sector, and expose consumers to very serious data privacy risks,” tweeted witness and crypto criminal defense attorney, Carlo D’Angelo, of his testimony Monday. “I further stressed that these proposed regulations pose an existential threat to the future of crypto and DeFi in the United States.”

The 1099-DA form is officially expected to roll out next year and marks the beginning of more robust regulatory oversight of the crypto community. It remains to be seen what, if any, impact the comments will have on the regulatory proposal.