The Internal Revenue Service (IRS) plans to crank up its surveillance efforts on crypto usage. To achieve this, the IRS released proposed rules on crypto taxation. The deadline to submit feedback was October 30, 2023, and the IRS received over 117,000 comments. Most commenters raised concerns regarding privacy, reporting requirements on stablecoins, and the excessive burden on brokers.
The Origin of the Rules
The proposed IRS rules trace their origins to the Infrastructure Investment and Jobs Act of November 15, 2021. In summary, this law established new reporting guidelines, which risked imposing a de facto crypto mining ban. The result would have been that millions of Americans are exposed to potential felony crimes.
However, the 300-page document by the IRS is not as restrictive as it could be under the interpretation of the new act. When the act passed, Congress argued that increased surveillance would boost tax revenue. The Joint Committee on Taxation’s report claimed that increased surveillance would yield up to $28 billion in revenue over ten years. However, the figure went down to $2 billion in the recent White House budget for fiscal year 2023.
DoJ Proposed Rules
In September 2022, the Department of Justice (DoJ) published a report in response to Executive Order 14067. The report provides a detailed explanation of how the DoJ could utilize data gathered from increased surveillance by the IRS. One recommendation by the DoJ is that it should have the power to seize crypto assets even without a court order—known as administrative forfeiture.
Details of the Proposed IRS Tax Rules
The new proposed rules’ wording defines a broker as both centralized and decentralized exchanges. However, the IRS clarifies that miners and validators are not brokers as long as they do not engage in any other activity.
Under the new rules, brokers must provide detailed information, including names, addresses, and taxpayer ID. They will also have to provide wallet addresses and transaction IDs. In general, the proposed scope of information is huge. The information will be reported on a new IRS Form 1099-DA.
Under the proposed rules, brokers must start reporting on gross profits from digital asset sales starting January 1, 2025. The reporting will be required starting in 2026. Reporting is required for all sales executed starting on January 1, 2026, for adjusted basis and character of loss or gain. That reporting will be required from the start of 2027.
The public hearing for the rules was to start on November 7, but the IRS rescheduled it to November 13, 2023. It is unknown when the IRS will issue the final regulation after the hearing.
Implications for Crypto Traders
The new IRS proposed rules are concerning for the crypto community. Many are worried about intrusion into personal financial privacy. The rules could drive the crypto industry underground. For instance, it could make decentralized finance more lucrative. However, the sector is built on innovation and could overcome this challenge.
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