On 25 August 2023, the U.S. Department of the Treasury, in collaboration with the Internal Revenue Service (IRS), unveiled draft regulations aimed at tightening the reporting requirements for digital asset transactions. This move is part of the Biden-Harris Administration’s broader strategy to plug tax compliance loopholes and mitigate the risks of tax evasion in the rapidly expanding digital asset sector. The public has until October 30, 2023, to comment on these draft regulations, offering a crucial period for stakeholders to express their views.
The draft regulations propose that brokers facilitating the sale and exchange of digital assets must report specific transactions. This aligns them with existing reporting requirements for traditional financial instruments like stocks and bonds. The Treasury Department contends that this will simplify tax calculations for digital asset holders by mandating brokers to issue a new Form 1099-DA.
The draft regulations also outline a timeline for implementation. If approved, brokers will be required to start reporting digital asset sales and exchanges from 2026, covering transactions made in 2025. According to estimates from the nonpartisan Joint Committee on Taxation, these draft regulations could generate nearly $28 billion in tax revenue over the next decade.
Public hearings are scheduled for November 7 and 8, 2023, to discuss the draft regulations. Both the Treasury Department and the IRS have expressed their willingness to consider public comments from affected industries, taxpayers, and other interested parties before finalizing any rules.
The DeFi Education Fund is a nonpartisan research and advocacy organization committed to elucidating the benefits of decentralized finance (DeFi) and pushing for regulatory clarity in the digital economy. The DEF focuses on various areas, including policymaker education, thought leadership and research, grassroots advocacy, messaging, legal firepower, and best practices. Miller Whitehouse-Levine, who holds a B.S. in international politics and a minor in Mandarin Chinese from Georgetown’s School of Foreign Service, serves as the CEO. Before joining DEF, he led the Blockchain Association’s policy operation and worked at Goldstein Policy Solutions on a range of public policy issues, including crypto.
On the same day that these draft regulations were released, Whitehouse-Levine took to social media platform X (formerly known as Twitter) to voice his strong objections.
He began by labeling the Treasury’s proposal as “confusing and self-refuting,” particularly criticizing its new definition of a “broker,” which was expanded in August 2021 to include anyone responsible for facilitating transfers of digital assets for another person.
Whitehouse-Levine argued that the proposal’s attempt to identify non-existent financial intermediaries within the crypto space, such as DAOs and certain wallet providers, was misguided. He emphasized that decentralized networks inherently allow individuals to manage their own digital activities, making the application of traditional regulatory frameworks unsuitable.
He also pointed out an inconsistency in the proposal. While it acknowledges that users of self-hosted wallets manage their own transactions, it paradoxically tries to identify third parties responsible for these transactions. Whitehouse-Levine found this contradictory, stating that the proposal asks one to accept that “effectuating” doesn’t actually mean effectuating but rather providing “facilitative services.”
The CEO further criticized the proposal’s overly broad definitions, comparing it to the SEC’s rule-making, which he described as “effectively limitless.” He noted that the proposal could potentially include Internet Service Providers (ISPs) or other entities in the internet stack as brokers, a notion he found absurd.
Whitehouse-Levine concluded his series of posts by encouraging the public to read the proposal and submit comments, emphasizing that it touches on core issues of open access and decentralization that are relevant to the entire technology sector.