Nov 17, 2023

On Monday, federal officials heard from the industry on the mayhem the U.S. crypto tax plan could cause and a comment window is now closed.

Video transcript

Now it's tax week at coin desk. And our next guest is going to explain why the crypto industry has responded with over 100 and 20,000 comments regarding a controversial new tax proposal from the IRS. Joining us. Now to discuss is the director of research from crypto Think Tank Coin Center, Peter Van Valkenburg. Welcome to the show, Peter. Thanks for having me, Jim. All right, Coin Center filed one of the public comments that we're talking about in today's segment. Talk to us about Coin Center's uh comments and your thoughts around this proposal. Yeah, happy to. So, you know, for those who haven't kept track of the debate, this started two years ago when Congress passed the Infrastructure Act, which in order to pay for more infrastructure said it was going to close some gaps in tax reporting to get more tax collection with respect to virtual currencies, crypto these sorts of things. And Congress actually passed a pretty reasonable law at the end of the day. An early discussion draft of that law included really broad text that would have obligated people in DFI who are just publishing software to report on the capital gains of the people using their, using their software, which is I believe unreasonable because software developers aren't financial institutions in the traditional sense, they're not like Robinhood, they don't know your capital gains and they have no business collecting your personal information. But fortunately when we had that fight over the Infrastructure Act two years ago in Congress, congress ultimately narrowed the language to really just apply broker reporting requirements to true crypto intermediaries. Companies like Coinbase crack and these sorts of things. Now, the problem is the IRS then had to come and create a set of rules for implementing guidance for how that change in the law would be implemented. And so they started a notice of proposed rule making and they said, here's what we propose and interestingly and alarmingly, they basically went back to that original legislative text and said, actually, we want, we want to have people in D I who are just writing software obligated to report even though they have no business knowing that information. And so we filed a comment, lots of other groups have filed a comment in this process. It's not a final rule until they go through a notice and comment process and Coin center because our mission is to defend civil liberties and to defend people's freedom to use these technologies and to build these technologies. Our comment basically says, look, you can't obligate mere software developers to spy on the users of their software, which is what your proposal does and you can't go against the will of Congress. Congress clearly said, you know, apply third party tax reporting requirements to true brokers in the crypto space like Coinbase and cracking. We agree with that because it makes sense that people would be able to pay their taxes more easily. And it makes sense that we get good information about capital gains from the true intermediaries in this space where we don't agree is that it's right to force people who just write software to write their software in different ways that's compelled speech. It's against the constitution, the first amendment, our right to, to not be censored or forced to say things we don't believe and it's against the fourth amendment, our right to have some level of privacy from warrantless searches and seizures of our personal information. So that's our comment. Um, hopefully the IRS will heed our, um, our, our concerns and our cautions about the constitution and we'll see what the final rule is probably sometime next year early if the proposal goes through. Are you prepared to take legal action? Um, yeah, I mean, there's, there's, um, there's this notice and comment process where we say, look, here are issues with the, with the rules as you propose them. There's statutory issues, as I said. And there's constitutional issues if the proposal goes into effect and people begin to be obligated to, um, to comply. People who we think it's unreasonable to ask to comply with this rule. Those people should probably bring legal challenges. Now, whether Coin Center itself would be a co plaintiff in that kind of lawsuit. It's hard to say because we're not actually, we don't, you know, we don't develop deck software, but we would certainly be interested in finding people to challenge the law and helping them challenge the law if it was to go into effect as currently drafted. OK. So, II I think one of the things of course, uh and, and this is something that we, we discussed uh for the past several months and I think you hinted at it was the whole idea of these uh people effectively being brokers uh like miners, etcetera. Um And that's something that uh Patrick mckenry who for a brief time at least seemed to be running the country. Um He was upset about as well. So where are we with that? And uh th this is all playing into that, correct? I mean, this is sort of the same fight. Oh yeah, that is the same fight. So you're right to point out that several members of Congress both in the house led perhaps by um Representative mchenry who was acting speaker for a time, but also members in the Senate um Cinema and Portman, the senators that actually originally drafted the infrastructure bill language have all written subsequent legislation to say don't miss apply what we did. Don't be confused. We want you the IRS to collect tax information from true intermediaries like Coinbase and Kraken. That's the low hanging fruit for how we get better tax compliance in crypto. Don't go on a wild goose chase trying to force people who are just publishing software, which means they're exercising their freedom of speech to somehow change their business from being a publisher of information to a financial institution that actually has customer relationships with a bunch of customers. That kind of extremely drastic step isn't going to improve tax compliance because it's an irrational policy to tell people who just write software to, to change their line of business. And it's also of course an unconstitutional policy. So we've had champions in the Senate and in the house who have said, look, Treasury needs to be cautious about how it proceeds here. There's a lot of good that can be done from common sense, tax reporting standards for intermediaries. But Treasury also can go very wrong here, trample on our first amendment and Fourth Amendment rights and basically waste the time of law enforcement and tax professionals because these rules won't be able to be enforced. They're just, they're nonsensical in the context that they've been actually drafted. Were you surprised by any of the uh hundreds of thousands of, of comments that came through on the proposal? I'm so happy to see it. Um I think there's something fairly unprecedented about the, the rule and I think a lot of people are picking up on that and that's what's motivating people to comment. You know, we've had good third party tax reporting standards for the rest of the financial world for 30 40 50 years. And those standards are based on this idea that when you have a financial institution that's acting as your agent and you are their customer, it's of course reasonable to obligate that agent to say some things to the government and to you about your capital gains at the end of the year. Totally reasonable. This is the first time after decades of a sane um broker regime that we're trying to say no, you know what, even people who just write software should be collecting information. And I think a lot of people rightly recognize that as unprecedented and unconstitutional to try and like find a metaphor that helps people understand how this works. I think one thing we wrote in our comment that might be helpful is it's as if when you're trying to figure out all the books that Americans are reading, you decide. Ok. Well, we'll just tell authors of novels that they have to have in-person book signings. And during those in-person book signings, they'll collect information on who's reading their books and report it to the government. It's an absurd policy like it, it, it violates privacy and it forces a bunch of people who are engaged in protected activities like speech to change their line of business. And to speak in a way that, that is against their closely held political and moral beliefs.

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