In a recent letter addressed to The Honorable Lily Batchelder, Assistant Secretary of the U.S. Department of the Treasury, concerns have been raised regarding the proposed IRS rulemaking (REG–122793–19) on Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions. The letter, signed by industry stakeholders, sheds light on potential challenges that, if left unaddressed, could impact the burgeoning digital asset ecosystem.
Broader Definitions and DeFi Implications
One of the primary concerns voiced in the letter revolves around the broad definition of a “Broker” within the proposed regulations. In an effort to include entities providing “facilitative services that [directly or indirectly] effectuate the sales of digital assets by customers,” the proposed definition could inadvertently encompass a significant portion of the digital asset ecosystem, including decentralized finance (DeFi) exchanges.
Many DeFi entities, which act as platforms facilitating transactions without direct involvement in user activities, find themselves caught in the proposed regulatory net. The letter argues that this expansive definition fails to consider the nuances of DeFi protocols, leading to potential unintended consequences.
The “Position to Know” Standard and Reporting Redundancy
The proposed regulations introduce a shift from the “ordinarily would know” standard to the “position to know” standard for identifying brokers. This change, while aiming to encompass a broader range of entities, could result in reporting redundancy. By including entities with the ability to change fees for facilitative services as being “in a position to know,” the IRS may receive multiple reports on a single transaction from different parties, increasing costs and administrative burdens for both market participants and tax authorities.
Digital Asset Definition Challenges
Another significant point of contention is the definition of “Digital Asset.” The proposed regulations categorize “digital assets” as a “digital representation of value that is recorded on a cryptographically secured distributed ledger (or similar technology).” While this definition is inclusive, its explicit mention of stablecoins and nonfungible tokens (NFTs) may inadvertently hinder their use in the market.
Critics argue that the proposed regulations fail to differentiate between various types of NFTs, potentially limiting the application of these unique digital assets. Additionally, the broad categorization of stablecoins as digital assets for tax reporting purposes may deter their integration into payment systems and undermine regulatory efforts in this space.
Comment Period and Implementation Time Frame
The letter also expresses concerns over the expedited timeline for both the comment period and implementation phase. Industry stakeholders argue that the short time frame limits comprehensive feedback and impedes market participants’ ability to come into compliance effectively. They advocate for an extension of the comment period until December 31, 2023, to allow for more thorough feedback and consideration of potential adjustments to the final rule.
In conclusion, the letter highlights key concerns that industry stakeholders believe should be addressed before finalizing the proposed IRS regulations. The outcome of this dialogue will play a crucial role in shaping the regulatory landscape for digital assets, emphasizing the need for a careful balance between taxation requirements and the evolving nature of the digital asset ecosystem.
