For two years, the cryptocurrency world has been waiting to see how Internal Revenue Service (IRS) would implement the Infrastructure Employment and Investment Law. Simply put, this law established new reporting requirements that risked establishing a de facto ban on cryptocurrency mining and exposing millions of Americans to new serious crimes. The good news is that the IRS' nearly 300-page proposal is not as bad as it could have been under the law. However, that is far from saying it is good policy.
As citizens, businesses, and consultants finish drafting their comment letters ahead of the Oct. 30 response deadline, it's important to take a step back and recognize why businesses should not be required to report their clients to the government by default.
Remembering the year 2021, the Infrastructure Employment and Investment Law was about the construction of roads, bridges and the like; It wasn't about cryptocurrencies or financial reports. It was not until funding was desperately needed to offset the expense that members of Congress included two provisions to increase financial oversight of cryptocurrency users. Their argument was that increasing surveillance would increase tax revenue, effectively accusing cryptocurrency users of tax evasion.
Related: New tax rules could mean an American exodus for crypto companies
At that time, the Joint Committee on Taxation deemed that the provisions produce about $28 billion in tax revenue over 1 year. Without a way to replace the financing, attempts to eliminate controversial reporting requirements They were finally rejected.
The $28 billion figure was questionable at the time. And less than a year later, the Biden administration released its budget, which contained a very different estimate. In contrast to the $28 billion estimated by the Joint Committee on Taxation, the Biden administration estimated that only $2 billion would be received over the next 10 years. And now, even that figure could be an overestimate, as Treasury officials acknowledged that the estimates were based on a very different market.
With cost offsets ruled out, what remains appears to be little more than another brick in the wall of American financial oversight.
The IRS proposal, again, doesn't seem as bad as it could have been, since it excludes miners and some software developers for now. Still, the proposal chooses a troubling path for deciding who should be required to inform customers.
The premise seems to be in part based about "whether a person is in a position to know information about a customer's identity, rather than whether a person would normally know such information." The proposal states that this distinction is made because some platforms โhave a policy of not requesting customer information or requesting only limited information.โ [but] โThey have the ability to obtain information about their clients by updating their protocols.โ For this reason, the proposal states that the IRS expects that some decentralized exchanges and self-hosted wallets will be forced to report their customers' private information.
The IRS reports that 1,726 comments have been received so far.
Those are rookie numbers.
Unless you want to:
- All crypto sites and wallets must have your SSN, and
- Nodes, developers, governance and LPs will be intermediaries in case of technical non-compliance.
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โ CryptoTaxGuy.ETH โโจ-โจ ๏ธ (@CryptoTaxGuyETH) October 17, 2023
In other words, while businesses may have no reason to collect sensitive personal information from customers, the basis on which the IRS works is whether they have the ability to do so. This may be somewhat limited given that the focus is on companies providing a service, but โthe ability to collect informationโ appears to be little more than โdefault collection.โ
While worrying, this approach should come as no surprise. Little by little, the United States government has been establishing broader financial reporting requirements with the Bank Secrecy Act, the Patriot Act, and many other laws and regulations. The provisions of the Infrastructure Jobs and Investment Act and the resulting IRS proposal are just the latest version of this expansive framework.
Related: Prepare for a swarm of incompetent IRS agents in 2023
However, rather than continuing to expand the scope and depth of financial oversight, now should be the time to question the entire premise. In a country where Americans are supposed to be protected by the Fourth Amendment, companies should not be forced to report their customers to the government by default. Activities like using cryptocurrency for payments, receiving more than $600 in PayPal after a garage sale, or receiving a paycheck from a job should not include you in a government database.
Moving away from this surveillance status quo might require fundamental changes to US law, but that doesn't mean doing so is a radical idea. When surveyed by the Cato Institute, 79 percent of Americans said it is unreasonable for banks to share financial information with the government and 83 percent said the government should need a court order to obtain financial information.
It is those principles that should guide the debate. So while the Oct. 30 deadline to respond is right around the corner, commenters should weigh what the proposal does and doesn't say.
Furthermore, while the focus is currently on the IRS, let us not forget that the responsibility for fixing both the current situation and the status quo of financial oversight in general falls in the halls of Congress. At the end of the day, the IRS is doing what Congress told it to do. Therefore, it is Congress that must intervene to reform the system as a whole.
nicolas antonio is a policy analyst at the Cato Institute's Center for Monetary and Financial Alternatives. He is the author of The Infrastructure Jobs and Investment Act's Attack on Cryptocurrencies: Questioning the Justification of Cryptocurrency Provisions and The right to financial privacy: developing a better framework for financial privacy in the digital age.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
