In a letter to the Internal Revenue Service (IRS), Coinbase – America’s largest cryptocurrency exchange by trading volume – raised “serious concerns” about the “nature” and “scope” of its proposed crypto tax laws, stating the regulations could have negative implications on the industry and potentially endanger users’ privacy.
Back in August, the IRS and the U.S. Treasury Department put forth a new rule to formally define crypto brokers and provided them guidance on how they and their customers could properly pay taxes.
The 300-page rule book in compliance with the Infrastructure Investment and Jobs Act passed by President Biden in 2021, set out reporting obligations for crypto service providers, including centralized crypto exchanges, payment processors, U.S.-based decentralized exchanges, and some hosted wallet providers, and individuals or entities that redeem crypto tokens.
Coinbase Deeply Concerned With Newly Proposed U.s. Crypto Tax Regime
However, on Thursday, Coinbase’s VP of tax, Lawrence Zlatkin, wrote a letter to the IRS stating that the newly proposed crypto tax regime would establish “incomprehensible” and “burdensome” reporting requirements and could impose an “unprecedented, unchecked, and unlimited” tracking on the daily lives of American citizens. The crypto giant added that the rules would “degrade” and “displace” the same taxpayer services that the IRS is seeking to improve.
Coinbase also pointed out what it believes to be “overarching observations” connected to its objections. These were: lack of parity with financial services, duplicative and burdensome reporting, invasion of privacy, violation of tech neutrality, unrealistic compliance timeline, and missed opportunity to leverage blockchain to ensure taxpayer compliance.
The company added that the IRS’ “overbreadth” is counterproductive and will make it harder for the agency to enforce tax laws on cryptocurrency transactions involving U.S. residents.
Meanwhile, The Blockchain Association, a U.S. crypto advocacy group, argued that the tax proposal’s “breadth” would harm all areas of the crypto ecosystem. The group argued that by expanding the definitions of “digital assets” and “broker”, the IRS was attempting to pull in people and projects who would otherwise not fall within the scope of the upcoming crypto tax reporting obligations.
Blockchain Association Says The Tax Rule Could Kill The American Crypto Sector
According to the new regulations, crypto brokers would be required to collect the personal information of users, including their name, address, and tax identification number, and then provide them with a form 1099 to calculate their profit and losses from the digital asset sale facilitated by the broker.
The group addressed concerns regarding the privacy, security, and ability to access decentralized crypto platforms for users. They also highlighted that the proposal would create an “unworkable” tax reporting requirement for a wide range of participants in the crypto ecosystem that would cause projects to shut down operations or move abroad, jeopardizing blockchain and crypto innovation in the United States.
Earlier, the IRS had released an estimate of the “tax gap”, arguing that digital assets and cryptocurrencies were causing a shortfall in tax revenues for the agency due to regulatory non-compliance.
U.s. Lawmakers Argue The Tax Regime Could Generate “Billions In Tax Revenue”
At the same, a group of senators, led by Elizabeth Warren, sent a letter to the IRS declaring their support for the proposed crypto compliance regulation. They wrote that the Biden administration’s tax rules would fight against any “industry efforts” to evade regulation, provide further clarity to law-abiding taxpayers, and also generate billions in tax revenue from a “chronically tax-avoidant” crypto sector.
The lawmakers advised the agency to rebuff all industry complaints and advance the tax reporting requirements for digital asset brokers “as swiftly as possible”.
Coinbase has asked the tax authority to re-write the proposal to limit compliance requirements to entities that “directly effectuate” transactions in digital assets similar to those in the traditional finance sector.
The IRS will continue to review comments from the public and industry players about its crypto tax rule until October 30. A public hearing is scheduled for November 7 before the proposal is finalized.
Coinbase plans to send another letter to the agency that will provide more detailed observations and technical comments regarding the tax compliance regulations.
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