The Internal Revenue Service has proposed to establish a tax policy for digital assets including cryptocurrencies. This has the industry in an uproar and investors in crypto plan to have their say in IRS hearings held on the subject.
Even for those that don’t yet invest in cryptocurrency latest news is a sign that more regulations are coming and that the industry is changing. This comes amidst the idea the US Federal Reserve should create its own cryptocurrency and thus get more involved in the industry.
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What’s the Proposal About?
The proposal is often talked about as if it taxes cryptocurrencies for the first time. This isn’t the case and it isn’t the main concern the industry has with it. Instead, the proposal made by the IRS changes how the crypto investors are obligated to report on their taxes. It specifically targets hosted wallet providers, payment processors, some decentralized finance (DeFi) entities, and others as brokers.
IRS also called for a public comment section, asking industry leaders and experts to post a series of comments to be used at a public hearing to further shape and inform the decision.
The Public Comments
The cryptocurrency industry listened and took note of the comment option. They’ve made over 200.000 comments so far, causing the IRS to move the hearing to the 13th of November. The comments include criticism of the proposed action and ideas on how it could be improved, having the interest of the cryptocurrency industry in mind.
The IRS posted about 40.000 of these comments online as it went through them, as a part of a larger attempt to engage the public in the process. A few major themes came up in almost every comment and therefore they will be the main source of discussion at the IRS hearing.
· Privacy concerns
· How to report on stablecoin transactions
· The collection of burden on brokers
DeFi
The main change the IRS is introducing comes from expanding the term “broker” so that it includes DeFi platforms. The critics say that it’s not possible for DeFi to report transactions in the way traditional brokers could.
Some also claim that the government will keep the record of the transactions and that imposes a new level of scrutiny not only on the industry but on the general public. The government would have a list of every transaction made using crypto including everyday purchases.
The Promise of Online Anonymity
One of the most important reasons investors went into decentralized financial structures is the ability to use their services without having to provide private information. The platforms are therefore designed not to collect data. This is what makes the proposed tax policy so difficult for DeFi platforms.
The regulations call for collecting personally identifiable information and providing it to the IRS. The argument the crypto industry is using isn’t that it won’t do that, but that it can’t since it would take years to reconfigure the decentralized financial institutions to do it.
Issues with Stablecoins
Stablecoins were a unique product that combined the qualities of a cryptocurrency with that of a currency issued by the government. This has made the product more stable and less prone to market volatility – hence the name. Collecting data asked by the IRS for stablecoins would be a challenge for the IT infrastructure already in place.
The main request from the industry is for stablecoin to be excluded from the rules since it’s connected to the value of a traditional fiat currency such as the dollar. At this point, the IRS seems unwilling to do so.
How Small a Transaction Can Be?
The privacy concerns are mostly focused on the scope of the data the IRS will require. Almost everyone agrees that the government should be aware of purchases made in millions or tens of millions of dollars. However, there’s no such limit in the proposal made by the IRS.
As the rules are set up, a transaction as small as purchasing a cup of coffee with cryptocurrency will have to be recorded. As often happens, some of the comments started asking for special treatment for a variety of different industries and crypto businesses.
Public Discussion on Crypto
The IRS call for comments has caused a public discussion about the tax and crypto in general. As is often the case with such forums, not every comment was helpful or on point. Many dealt with the core idea of cryptocurrency and what it represents to those who believe in decentralized finance.
Some comments are about conspiracy theories and others deal with Richard Heart, the face of that project who’s now facing a Securities and Exchange Commission lawsuit. Regardless of these distractions, chances are that the IRS will set up a great discussion and end up implementing some of the suggestions in their new tax policy.
The Upside
There are also upsides to the process the IRS started. At this point, it may seem the hearing process is too disorganized and the proposal set by the IRS is too broad. However, there’s a silver lining to it. First of all, the proposal will establish a digital status for cryptocurrencies.
This is the first and major hurdle for the industry. Cryptocurrencies are now widely used in the US and all over the world. It’s about time for it to be accepted by the government as a valid payment method and a tool for storing value.
The Voice of the Industry
A public discussion will take place about crypto and how to approach taxing it. It will start with the comments and the hearing set up by the IRS but it will go beyond that. All of this happens during the presidential and senatorial elections and the candidates are already discussing the issue publicly.
The Biden administration has also discussed creating a cryptocurrency backed by the government and Republicans came out against it. In the broader sense, putting crypto at the center of public discussion can help the industry.
How Will The Investors React?
It’s not easy to predict how the investors will react as it’s not yet known what the policy will be. However, the changes in taxation will certainly lead to changes in the market itself. Some investors are interested in the private and decentralized features of crypto and for them, this is a big problem.
Others would welcome more government regulations and oversight as it means that the industry is safer to invest in and predict in the long run. Chances are that some applications of crypto will suffer in particular, as they rely on anonymity most of all.
To Sum Up
IRS holds a hearing on their proposal to tax DeFi. The hearing comes after the IRS has called the interested parties to send comments on their proposal and the industry has done just that. There are already 200.000 comments and these, combined with the hearing, may end up shaping the conversation.
At this point, the IRS plans to change the rules on reporting on cryptocurrency income. This will make the transaction easier to monitor, track, and catalog. The industry is strongly against such an approach and now the ball is in the IRS’s court.
