A pair of Democratic House members urged the Treasury Department and the IRS to issue proposed regs reflecting digital asset broker provisions of the Infrastructure Investment and Jobs Act (IIJA; PL 117-58) to reign in reporting of crypto transactions.
California Representative Brad Sherman, ranking member of the House Subcommittee on Capital Markets, and Stephen Lynch of Massachusetts, ranking member of the Digital Assets, Financial Technology, and Inclusion Subcommittee, wrote in a June 5 letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel to express their “deep concern about the state of tax compliance of the cryptocurrency industry.”
“For years now, that industry has been a major source of tax evasion and a significant part of the nation’s tax gap,” the lawmakers said.
The IIJA enacted rules for digital asset brokers under Code Sec. 6045 and Code Sec. 6045A to record and report crypto transactions to the IRS, which were set to apply to transfers to non-brokers made on or after January 1, 2023. Under the November 2021 law, a digital asset is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified” by Treasury. A digital asset broker includes “any person who (for consideration) is responsible for regularly providing any services effectuating transfers of digital assets on behalf of another person.”
However, on December 23, 2022, the IRS delayed the Form 1099 information reporting requirements until final regs are issued (Ann. 2023-2). As stated in their letter, the lawmakers are of the mind that the Office of Management and Budget’s Office of Information and Regulatory Affairs have “completed its review” of the proposed version of such regs in February. They stressed that the regs have not been promulgated despite allegedly being reviewed months prior.
“The cryptocurrency industry had all of 2022 to prepare for the [IIJA’s] tax reporting requirements and now it apparently gets 2023 off as well,” read the letter. “We hope Treasury/IRS will promptly release the proposed regulations so we can close the tax gap and bring the cryptocurrency industry into full tax compliance.
The Biden administration has since continued to put forward crypto proposals in the meantime. The fiscal 2024 Greenbook, the administration’s annual collection of revenue-raising ideas, features an excise tax equal to 30% of the cost of electricity used to mine crypto to address environmental concerns. It would be phased in at 10% beginning 2024 and ramp up 10% each year until reaching 30%.
Also, the so-called wash sale rules under Code Sec. 1091 would apply to digital assets. Currently, when securities are sold at a loss, “substantially identical” securities cannot be purchased within 30 days loss claiming purposes. For more, see Baker Tilly’s Kasey Pittman Talks ‘Crypto Winter’ Tax Strategy (03/23/2023). The wash sale rule does not apply to cryptocurrencies because the IRS doesn’t classify them as securities, but rather as property.
It has been debated which government agency should be responsible for which aspects of the crypto market, something various proposed bills have tried to address, such as the Responsible Financial Innovation Act (S 4356), introduced by Senators Cynthia Lummis, Republican of Wyoming, and Kirsten Gillibrand, Democrat of New York.
Securities Exchange Commission (SEC) Office of Investor Education and Advocacy Director Lori Schock wrote in an online post that taxpayers “should understand if you lose money there is a real chance the SEC and other regulators won’t be able to help you recover your investment, even in cases of fraud.”
“There may be significant risk involved in putting your money into something that hasn’t been around very long,” Schock added.
In late April at an industry event, Consensus 2023 (run by crypto outlet CoinDesk), IRS Project Director for Digital Assets Julie Forester was asked why crypto regs and guidance in general take so long to roll out. Forester responded that a challenge with promulgating regs is the “ever-changing, ever-evolving nature” of the industry.
“It looks this way this second and two seconds from now it looks [like] something different,” she said. “It’s going to take us time.” She emphasized that the agency is “working very hard to get it right and get information into the hands” of taxpayers.
“It takes a village.”
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