The US Department of the Treasury and Internal Revenue Service (IRS) on Friday released new proposed regulations that would require the brokers of digital assets to report certain sales and exchanges in an effort to crack down on tax cheats, as well as to assist law-abiding taxpayers know how much they owe.
As per an announcement made on the Treasury Department’s website, “the proposed regulations would clarify and adjust the rules regarding the tax reporting of information by brokers, so that brokers for digital assets are subject to the same information reporting rules as brokers for securities and other financial instruments”.
According to the Treasury Department and IRS, under current tax laws, digital tax calculations are “difficult and costly to calculate”.
Under the administration’s new proposal, brokers will be required to provide a new Form 1099-DA, which it says will help taxpayers determine if they owe taxes, and would help taxpayers avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns.
“These regulations align tax reporting on digital assets with tax reporting on other assets, and, as a result, avoid preferential treatment between different types of assets”.
If approved, the rules would require top cryptocurrency exchanges to report customer information to the IRS.
The proposed regulations are now open to a period of public comment and feedback.
Written comments will be accepted until October 30th, while a public hearing has been scheduled for the 7th and 8th of November.
Crypto Tax Proposal an Attempt to “Kill” Adoption, Says House Financial Services Committee Chair
In response to the proposed regulations, chairman of the House Financial Services Committee Patrick Henry (a Republican) claimed that the Biden administration is trying to “kill” crypto adoption in the US.
That’s because the proposed regulations would also target decentralized exchanges (DEXs).
Decentralized exchanges, such as Uniswap, are not centrally controlled by an entity with the discretion to easily tweak platform features (i.e. to start collecting user info and passing it on to the IRS).
Rather, they are powered by immutable smart contracts that have been deployed onto decentralized blockchain protocols, such as the Ethereum network.
According to a tweet from Delphi Labs general counsel Gabriel Shapiro, the proposed rules “could be a devastating blow to the use of P2P protocols”.
Meanwhile, Kristin Smith, CEO of a crypto-advocating non-profit organization called Blockchain Association was quoted by Decrypt as saying that “given the reporting requirements, a platform or protocol would need to centralize in order to comply, eliminating all benefits of decentralization including security and transparency”.
While some will argue that the proposed rules are fair, as they bring digital asset reporting requirements in line with those of other asset classes, others will argue that the proposed rules, especially as they extend to decentralized applications like DEXs, are an attempt by the US government to exert excessive control over the crypto ecosystem.
After all, the central ethos of crypto is decentralization and no self-respecting DEX protocol will bend to the US government information collection and reporting requirements.
This could lead to an outright ban on using these DEXs in the US for US citizens, hampering web3 adoption in the country.