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Advocates Argue IRS Stretching Statutory Definition “Beyond the Breaking Point”

In a public hearing, cryptocurrency industry advocates voiced concerns over the IRS’s proposed regulations on digital asset reporting, explicitly criticizing the broad definition of “broker” under Section 6045 (REG-122793-19). Critics argue that the IRS’s interpretation goes too far, indirectly encompassing individuals and entities involved in transactions, leading to heightened security and privacy risks.

Industry Leaders Address Concerns of Overreach and Burden on IRS

Lawrence Zlatkin, Vice President of Tax for Coinbase, emphasized that the proposed regulations could burden the IRS significantly. Zlatkin cited the agency’s estimation of receiving a staggering 8 billion information returns, primarily from the Form 1099-DA designed to report gross proceeds of digital asset sales and exchanges. However, an IRS official later clarified that the figure is an estimate, and the exact number remains unpredictable.

Regulations Draw Criticism and High Volume of Public Comments

The proposed regulations have generated widespread criticism, with nearly 125,000 comments submitted, including approximately 45,000 on Industry leaders express concerns over the IRS’s ability to manage the anticipated volume of information and suggest that the initial estimate of 13 million to 16 million affected digital asset owners could be a conservative figure.

Proposed Regulations Extend Reporting Rules to Brokers and Digital Asset Platforms

In response to amendments made by the Infrastructure Investment and Jobs Act, the IRS and Treasury have proposed extending information reporting rules under Section 6045. This includes brokers acting as agents, principals, or digital asset mediators, covering sales or exchanges of digital assets for cash, broker services, and applicable property types. The regulations also encompass brokers facilitating payments of digital assets associated with payment card and third-party network transactions.

Privacy Concerns Raised Over Broad Definition of Brokers

Industry speakers voiced privacy concerns, asserting that the expansive definition of “broker” would result in the unnecessary sharing of personal information. Brokers would be mandated to collect, store, and report users’ crypto wallet addresses to the government, raising fears of comprehensive transaction history tracking. Critics argue that this broad approach could expose sensitive information and that some NFTs, particularly those categorized as collectibles, should be excluded from the proposed regulations.

Call to Narrow NFT Definitions and Exclude Indirect Service Providers

Gina Moon, General Counsel for OpenSea, urged a more precise definition of NFTs subject to the proposed regulations. Advocates offer excluding NFTs that function primarily as collectibles rather than financial instruments. Moon and others argued for removing indirect service providers from the definition of digital asset mediators to balance tax compliance and protect security and privacy.

In summary, the cryptocurrency industry challenges the IRS’s proposed regulations, citing concerns over the broad definition of “broker,” potential privacy risks, and the immense burden on the IRS to handle an anticipated influx of information returns.

Source ( Journal of Accountancy News).