Tell the IRS:
IS NOT THE ANSWER
The Treasury Department must withdraw its misguided and unconstitutional "broker" rulemaking, which will essentially ban DeFi in the United States.
There are multiple tools already available to help you make sure the IRS hears your concerns. Use LexPunk's tool to have AI help you write a comment letter, or use Fight for the Future's comment submission form to write a letter. We'll add additional tools as they come available.
Treasury and the IRS’s new proposed “broker” rulemaking is overly expansive and destructive, presents multiple unintended consequences, and will further suppress development of crypto and DeFi in the United States.
Decentralized networks eliminate the financial intermediaries, including brokers, that governments have grown accustomed to leveraging in order to accomplish public policy goals. The Treasury Department's proposed solution to this challenge is to simply designate as "brokers" persons not actually intermediating anything.
To do so, the Treasury Department proposes to interpret a new statutory definition of "broker" beyond any rational or cognizable limit. Treasury proposes to require people not just to report information they already have to improve tax compliance, as traditional broker reporting requirements do but also to proactively collect information from third-parties with which they have no relationship in order to report their information to the IRS.
Treasury should withdraw this rulemaking. It goes beyond the statutory definition it purports to interpret and is unconstitutional. Our friends at Coin Center rightly assess that "if being in a position to know something was the constitutional standard for deputizing private actors to engage in state surveillance, well, then, it would be game over for the Fourth Amendment."
What does the proposal aim to accomplish?
Seeking to generate additional tax revenue and close loopholes, there was a provision added within the Infrastructure Investment and Jobs Act (IIJA), section 80603 specifically, that aimed to expand of the definition of the term “broker” to capture more individuals, especially in the digital asset space, and place broker reporting requirements on them.
The expanded definition includes anyone who provides a service “effectuating transfers of digital assets” for others and the Treasury Department proposes to capture individuals “in a position to know” third-parties tax obligations as brokers, including software developers.
Furthermore, the proposal would:
Expand the definition of a “broker” to capture more digital asset entities for tax reporting that were not meant by Congress to be captured.
Expand the definition of “cash” for reporting purposes to include “any digital asset.”
Delegate broad authority to the Department of Treasury to amend the definition of “digital asset,” which will have long-lasting and potentially harmful implications.
What is the history of the “broker” rulemaking?
During the debate around the Infrastructure Investment and Jobs Act (IIJA) there was discussion on how to pay for the expansive nature of the bill. One solution, Section 80603, aimed to expand the definition of a “broker” in the hopes of capturing more entities for tax reporting to help pay for the provisions of the bill. However, the way in which the expanded definition was written, those in the digital asset industry sounded the alarm as the new definition would impose severe tax reporting burdens on the digital asset space and turn traditional non-broker entities, including cryptocurrency miners and validators, hardware and software developers, and protocol developers, into “brokers” under the expanded definition.
At the time of passage, an agreement to fix this flawed provision had been reached among Senate Democrats, Republicans, and Biden White House officials. Unfortunately, the Senate ultimately did not approve the consensus amendment due to procedural issues unrelated to the provision itself. The underlying flaws are unresolved.
Without codification clarifying Congressional intent, the Treasury Department, in August, decided to proceed with its overly expansive and destructive interpretation of the existing definition meaning that digital asset policy will be vulnerable to the shifting political whims of future Administrations.
How will this impact DeFi?
At a high-level, Treasury and the IRS’s interpretation could require crypto wallets, front-ends, and infrastructure providers to create tax reports for every user. This would force them to either block all U.S.-based users or start collecting names, addresses, and social security numbers from users to send them tax reports. This could very well kill DeFi and NFTs – really all permissionless crypto applications – in the U.S.
What happens next?
Typically, when Congress passes a tax law, it usually leaves the details to the IRS. In this specific situation, the IRS regulations interpret what are “digital assets;” and who “effectuates transfers” of them, i.e., who is a broker of digital assets.
In August, the Treasury and the IRS announced that they were moving forward with the rulemaking. That kicked off a 60 day comment period that ends on October 30. After the 60 day comment period, Treasury and the IRS will review comment letters and determine whether or not to modify, finalize or withdraw the rulemaking.
How can I get involved?
Fill out one of our form letters to either Treasury or your local elected representative to let them know that you are not supportive of the rulemaking as currently interpreted.
Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov.
Dear Ms Bathelder,
As an American who value their right to privacy, especially financial privacy, I am writing to express my disappointment with the Treasury and the IRS’s proposal to move forward with the newly created, and overly expansive, interpretation of the definition of a “broker.” I am worried about how this proposed interpretation might be used to wrongfully collect more personal information of Americans as well as its potential negative impact on the digital asset space in America. The last thing we want is for America to cede ground in what could be the next great financial revolution.
As you are probably already aware, Section 80603 of the Infrastructure Investment and Jobs Act (IIJA) expanded the definition of a “broker” in the hopes of capturing more entities for tax reporting to help pay for the provisions in the IIJA. However, the expanded definition of a “broker,” the one which Treasury and the IRS are moving forward with, posed serious problems for the digital asset industry at the time of debate, which led to an agreement among Senate Democrats, Republicans, and Biden White House officials that all but ensured that this troublesome interpretation would not move forward. Unfortunately, this agreement died in the Senate due to unrelated procedural issues and Congressional intent was never codified.
What we were left with is an interpretation of a definition that does not fully reflect Congressional intent at the time of passage of the IIJA.
This expanded definition of a “broker” will modify the definition of “effect,” as it relates to the various roles under which a traditional broker can take actions on behalf of customers, to now take into account whether a person is “in a position to know” information about the identity of a customer, rather than whether a person ordinarily would know such information. While this is in recognition of the fact that some digital asset trading platforms do not have a policy of requesting customer information or requesting only limited information, this revision means that any person that provides facilitative services that effectuate sales of digital assets by customers will be considered a broker, provided the nature of the person’s service arrangement with customers is such that the person ordinarily would know, or be in a position to know, the identity of the party.
This is incredibly worrisome.
Due to this expanded definition, crypto wallets, front-ends, and infrastructure providers (all entities who are not considered “brokers” in the traditional sense), will be obligated to either block all U.S.-based users or start collecting names, addresses, and social security numbers from users to send them tax reports. Such obligations could essentially outlaw permissionless crypto applications in the U.S., including decentralized finance protocols and NFTS, as well as create new conditions for personal, identifying information to be accessed by nefarious actors through the hacking of centralized repositories.
Therefore, I respectfully request that the Treasury and the IRS withdraw this proposed rulemaking and further engage with Congressional leaders to ensure that the intent of those representing the American people is taken into full account.
Thank you for your consideration and attention to this matter.