IRS, Treasury Aim to Snag Tax Cheats With Proposal

“Today’s proposal from the IRS is confusing, self-refuting, and misguided,” said Miller Whitehouse-Levine, chief executive officer of the DeFi Education Fund. “It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don’t exist, an ‘unsquarable’ circle that the proposal itself acknowledges.”

The IRS also will create Form 1099-DA for brokers to send to taxpayers to determine what they owe.

The agency last year replaced “virtual currency” with “digital assets” on its 1040 income tax forms as a precursor to issuing regulatory guidance. Previously, it wasn’t clear whether nonfungible tokens, or NFTs, were considered virtual currency.

Treasury makes clear in its proposal that the new broker reporting rules would apply to all types of digital assets, including NFTs. “Given that NFTs are popular investments, the buying and selling of NFTs raise tax administration concerns similar to the concerns associated with other types of digital assets,” the department said in the regulations.

Regulators Ramp Up

The proposal marks the latest attempt by the US government to rein in the digital-asset market — efforts that have ramped up since the collapse of crypto exchange FTX and other high-profile firms in the industry last year, which in turn caused cryptocurrency prices to drop.

The proposed rules make clear that companies that validate crypto transactions through mining or staking aren’t subject to the reporting requirements, a position Treasury signaled it would take last year and one that lawmakers on both sides of the aisle support.

House Financial Services Committee Chairman Patrick McHenry, a North Carolina Republican, said he was glad to see that exemption included, but that the proposal “fails on numerous other counts.”

He called the regulation “another front in the Biden Administration’s ongoing attack on the digital asset ecosystem,” in a post to the social media platform X (formerly Twitter).

Conversely, Senator Elizabeth Warren, a Democrat from Massachusetts, didn’t think the Treasury proposal went far enough. “A strong rule is essential to prevent wealthy tax cheats from hiding income in digital assets, and one should be implemented by the end of the year,” she said in a statement.

Comments are due by Oct. 30. The government will hold a hearing on the proposal on Nov. 7 if the public requests it. It’ll hold a second hearing on Nov. 8 if the number of requests to speak exceeds what can be accommodated in one day.

Kristin Smith, chief executive officer of the Blockchain Association, said in a statement that the crypto trade group is looking forward to weighing in on the regulations.

“If done correctly, these rules could help provide everyday crypto users with the necessary information to accurately comply with tax laws,” she said. “However, it’s important to remember that the crypto ecosystem is very different from that of traditional assets, so the rules must be tailored accordingly and not capture ecosystem participants that don’t have a pathway to compliance,” Smith said.

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