On November 13th, 2023, the IRS and Treasury held a public hearing on the proposed crypto reporting regulations. These proposed regulations elaborate on the 2021 changes to the Internal Revenue Code that expanded the definition of broker to include "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person," and are discussed in detail here.
During the hearing, various crypto market participants, representatives of exchanges, and crypto advocacy groups voiced concerns about the proposed regulations. Common concerns raised by participants included:
- Duplicative reporting could actually increase the difficulty for taxpayers filing returns, as taxpayers may receive multiple Form 1099-DAs from various brokers on any single transaction with the increased potential for inconsistencies therein;
- The disclosure of taxpayer information to brokers could lead to potential privacy concerns, and as a result, may undermine one of the factors favoring decentralized finance as opposed to traditional finance, namely the ability to transact in a secure manner without providing personal information;
- The extensive reporting required by various potential brokers could inundate the IRS with multiple returns and lead to overreporting, which may actually inhibit the IRS's and Treasury's attempts to adequately tax crypto transactions;
- The proposed regulations, and the difficulty complying therewith, could stymie growth in the crypto space; and
- The proposed effective dates for the broker reporting rules (generally January 1, 2025 for reporting gross proceeds and taxpayer information, and January 1, 2026 for reporting tax basis and character) may be too soon for the industry to adequately update their systems and procedures.
Notably absent from the hearing were representatives from traditional banking and finance organizations, depriving the IRS and the Treasury of the perspective of sophisticated financial institutions with extensive history in tax compliance. The IRS provided no indication that they plan to postpone the effective dates of the proposed regulations, notwithstanding the submission of substantial commentary to the IRS. At a minimum, the IRS and Treasury have a lot to consider before final regulations are promulgated.
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