Following significant pushback from the cryptocurrency industry, the Internal Revenue Service (IRS) held a public hearing on Monday morning, primarily discussing the recently proposed digital asset broker reporting regulations.
A storm of comments
The IRS’s proposed regulations were initially submitted on August 29, 2023, and have been the focus of controversy, with nearly 125,000 comments listed on the document as of Monday, November 13.
Proponents believe that the regulatory framework will open the door to accurate accounting and taxation of cryptocurrencies. However, critics argue that the proposed regulations will have a negative impact on the cryptocurrency sector as a whole, by threatening consumer privacy and ultimately expanding the scope of government overreach.
Exaggeration of information and overstatement
The proposed regulation has been criticized for its use of the term intermediary, which includes “a merchant, an exchange house and any other person (for consideration) who regularly acts as an intermediary in relation to goods or services.” Critics say the definition is too vague given the wide variety of entities that can be classified under the same umbrella.
“The proposed regulations interpret the term ‘intermediary’ to include a ‘digital asset intermediary,’ a vague and broad category of market participant that bears little resemblance to people historically considered intermediaries,” reads part of a comment from the DeFi Education Fund.
“The IRS is so obsessed with recovering consumers’ personally identifiable information (PII) and ensuring taxes are reported correctly that it ignores the costs of over-providing information,” said a commentary from Americans for Tax Reform. “This goes beyond what is required of traditional brokers.”
“An existential threat to the future of cryptocurrencies”
Furthermore, cryptocurrency players argue that the intermediary conflicts with the value of DeFi technology, claiming that the absence of a third-party intermediary is fundamental to peer-to-peer technology.
“There is little reason for the Treasury Department and the IRS to designate a ghost broker and force that ghost broker to report decentralized finance transactions and cost-based tax information,” says Michael D. Bodman, founder and president of Open Source Ventures. “There are no intermediaries in decentralized financial protocols, hence the innovation and value of the technology.”
“I have emphasized my concern that if these proposed asset reporting requirements are approved in their current form, they will significantly burden growth and innovation in the digital asset sector, and expose consumers to very serious privacy risks.” Data, Witness Criminal Defense and Cryptocurrency Attorney Carlo DeAngelo tweeted about his testimony on Monday. “I have further emphasized that these proposed regulations represent an existential threat to the future of cryptocurrencies and decentralized finance in the United States.”
Form 1099-DA is expected to be officially released next year and marks the beginning of stronger regulatory oversight of the cryptocurrency community. It remains to be seen what impact, if any, the comments will have on the regulatory proposal.