Aug 28, 2023

The IRS is finally proposing rules for crypto tax reporting, giving the industry its own 1099 form and declaring digital asset miners safe from the future requirements.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Good morning and welcome back to first mover. It's now time to talk about everyone's favorite topic, taxes. The IRS is finally proposing rules for crypto tax reporting. Joining us now to discuss this tax head of government relations. Miles fuller miles. Welcome to the show. Hey, good morning, Jen. Thank you for having me. Good morning. Thanks for being here. Let's talk about these new proposed rules, crypto exchanges, some hosted wallet providers and payment processors are going to face new tax rules in as soon as two years. Talk to me about some of the biggest changes. And is this going to bring clarity to a very kind of murky side of the industry? Not not the only murky side actually, if you look at what we've spoken about on this show already. Yeah, it should. Uh the plan is that it will be, it's very exciting. This is probably one of the most highly anticipated things to happen in this space. Uh As you're probably aware the law here, Congress passed almost two years ago. So everyone's been patiently waiting for the Treasury Department to issue these proposed regulations that would really govern the implementation of this new law. And so now we have that and it should provide a lot of court clarity as the, as the proposed regulations pointed out, the goal here was almost a little bit of a consumer focused goal to give those operating, investing in this space more clarity around their tax reporting. So they would know what to put on what information to have and they'd have it at their fingertips. So that's the goal goal here. And it's super exciting, but there is a lot to impact and a lot of new rules to be digested. Well, when you explain it, it sounds kind of simple. Why is it going to take two years to get this clarity to people who are investing in crypto? Well, I think that's a function of two things. First, I think the government understands that there's going to be some time needed for those that are covered by this rule. So you mentioned earlier, you know, the rule applies to digital asset brokers, uh that's going to cover on one end of the spectrum, centralized brokers, everyone agree, understood that a little bit novel. It's going to pick up payment processors are gonna be included in there. And then also it's gonna include some component of decentralized protocols. That's a little bit of a rule that has to be sorted out still there. They've developed a rule but it's going to be a fact based test. And I think what happens is those entities that are covered by these rules will then need to implement systems. Now, the other part from just merely an administrative rule making process is the fact that these are just proposed rules and when they were set up, they there's going to be a public hearing. So the government is clearly looking for feedback on the substance of these rules and that hearing is going to happen in a couple of months in November. And then after that hearing, the Treasury Department, the IRS will go back and digest all of the feedback that came in and perhaps make tweaks to before the rules are finalized. So there's a little bit more of the administrative process before all of this goes into effect, which is to your question, I think why the delay happens and because we're talking about taxes, everything in the tax world operates on an annual basis. So they have to implement them beginning any new tax year. Is there any worry that other developments in the industry like say regulatory clarity or further regulatory uncertainty would impact these rules given the kind of prolonged timeline here. It's possible. I think the Irs and Treasury Department have done the best they can to handle that or look ahead into that. And it's what's interesting in the rules, the way the rules function under the tax code is that they speak about things in terms, sometimes of being a covered security. That's just a definitional term in the tax code. Although the rules at the same time very, very clearly state that none of what the IRS is doing is meant to imply whether or not certain digital assets are not a security or are not a commodity for that matter. So the IRS is sort of built in the ability for there to be changes on other regulatory fronts and just say, hey, look, we're doing rules in our little space and our rules should be adaptable as other things change going forward. Now, you mentioned this uh a little bit earlier, but there are some decentralized finance platforms that uh will be taken into consideration under these new rules. There has been some pushback from the industry saying, well, you know, how, how can DFI platforms comply with tax rules if there are not people working there, there are not accounting departments to kind of gather the information that's needed. What do you think these new rules are going to mean for the D I industry? Well, I think in, in drafting the new rules and so a couple things came out first uh outside the United States, we have the OECD which came up with its uh crypto asset reporting framework and then it also has on the money laundering side, the financial action task for FA F and these rules seem to mirror what those rules say on an international scale when it comes to how you figure out whether or not a decentralized program or protocol, excuse me, should be subjected to these rules. And it's really looking for situations where although the protocol may operate autonomously that there is some group, whether that's a development group and investor group or other control group in the background that has the ability to has oversight over that protocol or able to make changes to that protocol. So that's where they're trying to draw the line. There was a lot of folks that speculated and thought that's where the line would be drawn and that seems to be. And so you do look, it looks like the United States here as the Treasury Department is trying to homogenize its approach with what the rest of the world is doing. This also issue came up recently in some proposed legislation here in the United States around anti money laundering laws, proposed piece of legislation last month that seemed to take a similar approach where they're really looking for situations that although the protocol itself may operate autonomously, there is a group in the background that has oversight over that protocol and can revise it or change it or whatever and that in the government's mind gives enough control that they should be responsible to set up a reporting regime. All right, I want to take a look at this tweet uh Miller White House, Levine, the CEO of a decentralized finance lobbying group set on X which is formerly known as Twitter. That the proposal as written is over broad with provisions allowing it to capture all sorts of entities. He pointed to self hosted or un hosts wallets. As one example. Do you, do you think that these are very, very broad regulations that have the ability to um I don't want to put words in this person's mouth but, but maybe have the ability to hone in on certain aspects of the industry. If and when uh law enforcement policymakers, regulators want to in the future, I think they are at this point. Intentionally, there's a couple spots where the I or the Irs and Treasury Department said that they intentionally took a slightly broader scope in the way they're drafting. However, you know, 300 pages of proposed regulations, there's a number of pages with over 50 questions where they explicitly asked the industry come back and tell us why you think this is not workable, why you think it's wrong. So that would be an opportunity for this, this person on X to, you know, to show up and provide feedback. And I'm sure I'm sure they will. And I think the goal here is the Irish is just trying to find the middle ground and really follow through with the congressional mandate here was to provide visibility, make life easier for those operating. I personally have spoken with a number of people who operate in decentralized finance space trying to do their taxes. And they're like, it's, it's very, very difficult and I, you know, I it's almost holding back. A number of people have commented they try to avoid the space because they just can't get tax clarity. So I think the government is trying to come up with a workable standard and that's obviously going to apply pressure on certain spots. But they did seem in the current draft to try and carve out when you mentioned un hosted wallets, they were very explicit say if it's, it's merely a wallet software. So something that allows you to control or interact with the network and, and exert control over units of a, of a Cryptocurrency that's not within scope that doesn't fall within the coverage here where they, what they did say would, would be if you're a, uh, excuse me, a wallet software provider. And you also paired that with exchange like services. So the ability to buy or sell crypto, then you do fall within. So it's the added uh utility to those to wallet software, but the wall software alone wouldn't be covered. All right. Miles. Thank you for joining the show this morning. We appreciate you providing that insight. Awesome. Thank you. That was tax head of government relations Miles Fuller.

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