Since Congress passed new regulations to make it simpler for the IRS to calculate how much money people make trading virtual currencies, the crypto community has been preparing for a tax crackdown from the Treasury Department for more than a year and a half.
After that, nothing has been spoken.
Even though the government has yet to produce a first draught of the regulations required to fill in the specifics of the new transaction-reporting requirements, the IRS still views cryptocurrency as a significant source of tax avoidance.
The fact that the regulations seem to have already been developed and approved by the White House budget office—which, until recently, was one of the final administrative steps in the process of establishing regulations—adds to the mystery.
The rules’ implementation date has been postponed indefinitely in the interim.
That has baffled many people, including Congressmen and solicitors like Lisa Zarlenga, a cryptocurrency tax specialist at Steptoe.
According to Zarlenga, a former Treasury tax officer, this is the single easiest thing they can do to increase compliance, but they’re not doing it.
The Securities and Exchange Commission is waging an aggressive campaign to crack down on cryptocurrency, in contrast to the IRS, which is moving at a tortoise’s pace. The SEC has filed a lawsuit to compel industry titans Coinbase and Binance to abide with its rules.
The government is making a prominent effort to minimise the projected $500 billion in taxes that are not collected annually, which is one of the main reasons why Democrats pushed through an initial infusion of $80 billion for the IRS. The delay also coincides with this effort.
For years, the tax authority had been pleading with legislators for the new crypto regulations, claiming that it needed additional authority to combat tax evasion by those who traded digital assets.
President Joe Biden lamented Republicans’ refusal to agree to a second crackdown on so-called wash sales during the debt-limit discussions, which would have prevented cryptocurrency holders from using paper losses to reduce their tax obligations.
Treasury is tirelessly working to complete these significant and complex regulations, according to a statement by spokeswoman Kristin Lynch for the department.
When asked why there was a delay or whether the rules will be made public, she remained silent.
The agency’s ongoing regulations may be controversial, reigniting a heated debate similar to the one that took place in Congress when the regulations were first authorised.
At the time, in 2021, lawmakers were sharply divided—even within each party—over whether facets of the world of digital assets should be covered by the regulations. Strange bedfellows like Sen. Cynthia Lummus (R-Wyo.) and Ron Wyden (D-Ore.), chair of the Senate Finance Committee, claimed that the standards were too stringent.
The $28 billion the crackdown was expected to raise was what lawmakers hoped to use to pay for infrastructure expenditures.
Those with an interest in the matter are now anxious to see whether the laws apply to things like decentralized exchanges, persons who create “cold wallets,” and miners in addition to obvious targets like Coinbase since Congress left many of the specifics up to Treasury to work out.
Reporting cryptocurrency transactions on annual returns is already required by the IRS. And to further emphasize that point, the agency started requesting that people declare on their forms whether they owned virtual currencies at any point throughout the year (in 2021, 2.3 million filers indicated “yes”).
However, the agency must rely on audits and John Doe subpoenas to exchanges for the information in order to ascertain whether what the taxpayer provides on a return is genuine or complete. Experts struggle to even estimate the amount of unpaid taxes related to cryptocurrencies because it is such a massive problem.
The laws that Congress has passed enter into play here. Brokers are required to disclose to both their clients and the IRS how much money they received in gross proceeds from the sale of digital assets.
The purpose is to give the IRS impartial data on transactions in addition to that. People are less inclined to conceal information from their returns if they are aware that someone else is filing a tax return.
Over the past 30 years, lawmakers have periodically expanded such “third-party reporting” to a wider range of payments, making it a staple of Washington’s tax-collection strategy. The IRS now collects more than 50 “informational” forms that include information on how much people get from stock sales, how much they make from their jobs, and how much interest they pay on their mortgage.
According to proponents, extending similar restrictions to cryptocurrency would boost tax revenue as well. Additionally, since they wouldn’t have to keep track of every sale, it would be simpler for individuals who own digital assets to file their taxes, especially if they are regular traders.
The government said late last year that the rules will be postponed from their original January implementation date.
One of the last stages in the regulation-making process was the White House Office of Information and Regulatory Affairs’ approval of the rules in February. The government recently said that OIRA would stop examining tax laws.
Even once the rules are made public, they will only be the first draught; the government must still solicit public feedback before finalising the specifications. The start date might be far off since, according to some experts, the agency won’t implement them in the middle of a tax year because it would be too problematic.
That, according to critics, is a bonanza for the cryptocurrency industry.
Rep. Brad Sherman (D-Calif.), at a recent hearing of the House Financial Services Committee, questioned Treasury Secretary Janet Yellen on the potential release date of the regulations.
When will these regulations be implemented? The SEC has demonstrated that they are not frightened of the crypto bros, he is aware that they are not afraid of them, and he hopes the IRS is not either. questioned Sherman, the panel’s ranking capital markets subcommittee member.
They’ll get back to you on that, said Yellen.
