On August 21, Coin Center, a cryptocurrency advocacy group, directed a letter to Senators Ron Wyden and Mike Crapo, detailing their suggestions regarding potential cryptocurrency taxation legislation.
A significant reference in the letter was the Virtual Currency Tax Fairness Act, a bill introduced in prior congressional sessions. Coin Center advocated for the Internal Revenue Service (IRS) to institute a de minimis exemption for crypto transactions. Such an exemption, they argue, would incentivize the adoption of crypto as a regular payment method, equating these digital transactions to those made with foreign currency.
Another pivotal topic addressed was the Tax Reporting Requirements. Coin Center advised against extending U.S. tax reporting obligations to second parties in digital asset transactions. The group emphasized the potential privacy infringements, especially if U.S. crypto users are mandated to provide possibly incomplete or inaccurate details about senders of digital assets. They highlighted the constitutional implications of such a move, noting that compelling individuals to extensively report about others to the government could infringe upon Fourth Amendment rights. Similarly, mandating politically affiliated entities to share donor details could violate First Amendment rights.
Diving deeper into tax nuances, Coin Center pressed for clarity in the definition of a broker from the IRS. They proposed that the definition should explicitly exclude roles like cryptocurrency miners and Lightning node operators. Furthermore, the group sought to curb the IRS’s authority in issuing legal summonses for those suspected of tax evasion. They brought up a 2016 incident where the IRS, through a “John Doe” summons, acquired substantial user data from Coinbase, including from those not necessarily implicated in any tax discrepancies.
Financial privacy, Coin Center warned, is paramount. Any precedent set, indicating that engaging in bitcoin transactions could jeopardize financial privacy, could negatively affect the entire blockchain ecosystem.
Lastly, Coin Center emphasized the urgent need for comprehensive IRS guidance on various cryptocurrency-related subjects, notably block rewards, airdrops, and hard forks. They also suggested the IRS should reconsider the necessity of a qualified appraiser for certain types of cryptocurrency donations.
The background context of these suggestions is the ongoing challenge of addressing the “tax gap” in the U.S. as the crypto sector continues to burgeon. Past legislative attempts, notably the bipartisan infrastructure bill of November 2021, have endeavored to tackle crypto tax issues. However, critics argue that some of these efforts result in impractical reporting burdens for everyday investors.
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