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A Long-Awaited Crypto Tax Rule Was Written Months Ago. Why Isn’t it Proposed?

Crypto investors and their brokerages are waiting for a U.S. tax rule that will completely overhaul how they report their cryptocurrency taxes, but the government isn’t offering any straight answers about its holdup even as prominent lawmakers clamor for the Treasury Department to finish the job.

In reality, the Treasury’s Internal Revenue Service (IRS) actually completed the proposal months ago – enough to get it through a formal internal review at the White House – but hasn’t taken the last step of issuing it publicly, and industry insiders are now wondering whether the White House has delayed the process while other crypto policy questions seized the spotlight in Washington.

When it comes out, the proposed rule will govern how crypto firms report information about customers’ tax positions – akin to traditional brokerages’ filings of 1099 forms that outline gains and losses. The industry’s potential worries include whether businesses will be asked to provide information they don’t have access to, or whether it will sweep in crypto companies that don’t have that kind of relationship with customers – such as mining operations.

But the bright side for the digital assets sector is that it potentially eliminates one of the central objections to crypto – that it’s hard for investors to work out the taxes. When crypto taxes are eventually handled in much the same way as other financial investments, many in the industry see that as another step toward proper government oversight in the U.S.

While the proposal may be ready to go, Cody Carbone, who leads the policy team at the Chamber of Digital Commerce, said that “pushback from the White House” may have held it back. He said there may have been fears of legitimizing the crypto industry with this rule while also debating oversight legislation for the digital assets markets and stablecoins – a congressional negotiation last month that the White House’s National Economic Council was said to have been a vigorous participant in. Still, Carbone said he’s heard the IRS may issue the proposed tax-reporting rules any day now.

“We're begging for these, because we want to know what we need to report, so we want to comply,” Carbone said.

The 2021 law that mandates this rule – the Infrastructure Investment and Jobs Act – also called for a reporting requirement to fully identify people making crypto transactions worth more than $10,000. On the law’s requirements, there will be plenty of complicated questions to work out, such as how the firms deal with customers maneuvering funds with private wallets that the business can’t see into and how the broker records may deal with interactions on truly decentralized platforms.

“Treasury is working diligently to issue these important and complex regulations soon,” the department told CoinDesk when asked about the delay.

The White House didn’t respond to a request for comment.

“We shouldn't be in a cloud of uncertainty,” said Lawrence Zlatkin, head of the tax arm at COINBASE Inc. (COIN), which is among the most prominent U.S. companies that will be directed by the new system. "Since our customers should be reporting crypto activity on their tax returns anyhow, we should be transparent and be able to give them the information so they can report it properly."

He said Coinbase has some infrastructure in place and is as ready as it can be, and it’s looking forward to being able to help investors figure out their taxes. “It helps us tell our customers what their gains and losses are, how they should be reporting information, what’s taxable, what’s non-taxable, what they should be asking their tax adviser, so that when they do all the things they do on Coinbase, they at least have some certainty as to how this will be treated,” Zlatkin said.

The wait in the meantime is “actually pretty frustrating, since we can’t prepare if we don't know what these rules are going to be,” he said.

In December of 2022, the IRS had assured the industry that it could keep going under existing laws and regulations until the new tax rules are finalized. To that end, the agency said that “a notice of proposed rulemaking will be published that sets forth proposed regulatory text, explains the proposed rules, solicits public comments, and announces a public hearing.” Only after all that is done – including that unusual and potentially time-consuming step of a live hearing – can the agency start analyzing the public feedback to write a final version.

Longshot for 2024

Proposing, gathering public comments and ultimately implementing a new tax rule is a process that usually takes several months – and often much longer – potentially stretching the process well into next year. That would be beyond the 2023 tax season, though it was meant to be in place this year and ready for the 2024 filings.

"The goal, if you read it, was that all these places needed to be collecting data during this current tax year, so they could generate these forms and hand them out," said Miles Fuller, a longtime former IRS lawyer who left last year to join TaxBit, a crypto-focused tax software company. If they still wanted to finish this for 2024 filings, he said, “you're really running tight on time.”

He said it was “very strange” to see the proposal go through its final pre-release steps and then remain locked up at the Treasury Department.

“It’s not realistic to think that these rules are going to be effective by Jan 1, 2024,” said Coinbase’s Zlatkin. He said it’s not just a matter of the industry adapting and complying, but also the IRS getting systems ready to absorb and analyze a significant new flood of data.

Some U.S. lawmakers aren’t ready to accept the requirements slipping to later tax years.

“Without quick action, your agencies are at risk of failing to meet their congressionally mandated deadlines for implementation of a final rule,” U.S. Sens. Elizabeth Warren (D-Mass.), Bernie Sanders (D-Vt.) and others wrote in a letter last week to Treasury Secretary Janet Yellen and Daniel Werfel, commissioner of the IRS. “We urge you to act swiftly to implement strong tax reporting rules for cryptocurrency brokers.”

The letter argued that setting up these requirements will net billions in tax dollars and let the IRS identify and pursue the worst tax cheats.

“Given the chance, tax evaders and the crypto intermediaries willing to aid them will continue to game the system, exploit loopholes, and siphon off billions of dollars a year from the U.S. government,” it said.

As for the industry’s fears that the proposal may cast too wide a net for “brokers” who have to comply, the Treasury did write a letter to lawmakers early last year that assured them it wasn’t trying to include businesses such as crypto miners that don’t typically have access to customer information.

For now, the IRS hasn’t openly thrown in the towel on a 2024 implementation.

“The IRS keeps telling us there’s no delay,” said Carbone. So, he said the industry’s accountants and tax service providers “are all planning right now as if these broker reporting rules are going to be implemented as it was passed.”

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Read More: IRS: Crypto Staking Rewards Taxable Once Investor Gets Hands on Tokens

Edited by Nikhilesh De.

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 8/7/2023

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