The Congressional Research Service ("CRS") outlined the benefits and drawbacks of imposing additional data collection requirements with respect to cryptocurrency transfers.

In a report, the CRS explained that while additional data collection and reporting of cryptocurrency transfers could reduce illicit financial activity and increase tax revenue, it may have adverse effects on the growth of the cryptocurrency sector.

The CRS detailed existing federal cryptocurrency transfer data collection practices for tax law administration and AML purposes, noting that:

  • the Internal Revenue Service's ("IRS") cryptocurrency data is incomplete because the data collected by the IRS is mainly through (i) summons and audits and (ii) information voluntarily furnished on tax returns and third-party information returns; and
  • FinCEN identifies cryptocurrency exchanges as money transmitters subject to its registration, recordkeeping and reporting requirements if the exchange either "(1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason."

As to current related policy proposals, the CRS cited President Biden's 2022 fiscal year budget, which proposes requiring IRS information return filings that include "the amount flowing into and out of customer accounts with gross flows above $600" for cryptocurrency exchanges and custodians. In addition, President Biden's budget proposes (i) separate reporting requirements for broker-to-broker cryptocurrency transfers and (ii) mandatory cryptocurrency transaction reporting to the IRS for businesses with cryptocurrency transactions that exceed $10,000.

The CRS also noted that the Biden Administration has proposed broadening reporting requirements for brokers to include data on U.S. and certain foreign account owners to "allow for automatic information sharing with foreign tax jurisdictions in exchange for information on U.S. taxpayers transacting in crypto outside the United States." Such expanded reporting requirements would also be applicable for crypto exchanges and wallet providers.

With respect to the aforementioned proposals, the CRS identified the following policy considerations:

  • In regard to reporting requirements, the entity responsible for reporting transaction data should be clarified because many cryptocurrency participants do not fall under the regulatory definitions of "broker."
  • The balance between individual rights and the right of the government to collect data should be determined because, while additional reporting requirements can facilitate compliance with existing regulations, they may exacerbate regulatory burdens and government scrutiny of businesses.
  • Improved tax reporting requirements can reduce the existing "tax gap," but underreporting will likely persist considering the anonymous nature of some cryptocurrencies.
  • Additional reporting requirements can enable FinCEN to more effectively ensure compliance with AML regulations and curb illicit financial activities, but they may result in reduced cryptocurrency transactions in the U.S. because the added obligations might be seen as the facilitation of a "paper trail."

Commentary Steven Lofchie

It is somewhat notable that the CRS study assumes both a concern for consumer privacy and the benefits of encouraging, or at least tolerating, payments using cryptocurrencies. It is not obvious that a majority of Congress shares those assumptions. See, e.g.Senator Warren Urges FSOC to Address Cryptocurrency Risks.

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