Our response to a recent editorial from Bloomberg on Congress’s crypto tax proposal

By: Lawrence Zlatkin, Global VP of Tax, Coinbase

Our response to a recent editorial from Bloomberg on Congress’s crypto tax proposalCryptocurrency Trading Signals, Strategies & Templates | DexStrats

As Global Head of Tax for one of the largest crypto exchanges, while I appreciate the Bloomberg Editorial Board’s perspective on the crypto tax provision in the Senate infrastructure bill, I would like to respectfully offer the following critique from a real-world actor in the crypto space. I disagree with the timing and need for the unexpected and new crypto tax provision in the bill and how it was drafted. The best first step would be to issue regulations so that digital asset brokers would be permitted to issue the same third-party reporting that brokerage firms, like Fidelity and Charles Schwab, issue today. It is not a good first step, and certainly not good tax policy, to require non-brokers to report on transactions for people who are not even their customers.

First, some facts —

The IRS already has the authority to require crypto brokers to provide regular reporting of the gains and losses of their customers’ accounts. But they haven’t. For years, the crypto industry has asked for those regulations, and we are still waiting.

The Editorial Board cites the IRS Commissioner’s estimate of the tax gap as $1T to underscore the urgency for including the crypto tax requirement in the infrastructure bill. Meanwhile, Congress’ Joint Committee on Taxation estimates that the crypto tax gap is approximately $28B over 10 years. In effect, crypto is a drop in the bucket when it comes to the tax gap. The Editorial Board neglects to mention this discrepancy, or that neither figure has ever been accompanied with further explanation or additional data. Without supporting data, both figures only serve to create hype and drama.

And while it’s true that the Senate infrastructure bill’s overbroad and unworkable language alarmed us, it also roused a public outcry well beyond the crypto industry. According to public reports, Senate offices were “swamped” with phone calls and emails, with almost 80 thousand people contacting their senators in just a few days. This wave of public advocacy was diverse, ranging from civil liberties organizations like the Electronic Frontier Foundation (EFF) to the Americans for Tax Reform. Social media lit up with citizens from all walks of life protesting this threat to crypto’s future, including non-apparent champions such as TikTok influencers and rock stars.

The Bloomberg Editorial Board says that the IRS needs a broad statute to include non-brokers right now because we don’t know what we don’t know. But why would we impose reporting requirements on intermediaries who are wholly unrelated to brokering a transaction and have no customer relationship? The IRS doesn’t do that outside of crypto and it shouldn’t do that here.

It is disingenuous to suggest that the IRS will take time to issue these regulations and that non-brokers should have no fear of the law until then. Tax policy should be thoughtful and deliberate. Broad overreach is a regulatory mistake. As long as the statute says that software developers, miners, stakers must do the impossible, there is no lawyer who would advise them to risk operating in violation of laws whose penalties for non-compliance would easily bankrupt them. This will harm innovation and stifle the potential of a hugely important technology at its earliest stages of development.

The one thing on which I do agree with the Editorial Board is that the requirements should “apply to entities that can provide the necessary information.” The Editorial Board also should have acknowledged that crypto brokers, like Coinbase, are currently precluded from reporting sales and exchange related information to the IRS. Without a specific legal mandate (such as the IRS regulations), we cannot compromise or disclose customer information to the government.

Now, some suggestions-

  1. “Brokers” of digital assets should be defined as it is understood in the real world today. It is well established that the predominant number of crypto transactions occur with brokers. If Congress decides that it must create a new definition of “broker” within the infrastructure bill for “digital assets,” then it should define brokers as persons who act as middlemen for compensation, with customers as counterparties. This is a traditional definition of broker and would cover entities like Coinbase.
  2. Propose regulations to define the parameters of tax information reporting for crypto. We would welcome the rules of the road so that we can have a meaningful discussion on how it should be introduced and applied in the real world. The IRS has this authority today.
  3. Hold hearings in Congress on tax oversight for crypto so that there is robust debate on the issue. Today, around 60 million Americans own crypto — roughly one-fifth of the entire U.S. population. Those Americans, and the entire crypto ecosystem, deserve more dialogue than midnight provisions inserted at the last minute.
  4. We should not draft legislation that focuses on crypto ghosts that don’t exist now and have no roadmap to exist in the future. If we focus our laws on problems that don’t actually exist, we will erode America’s leadership in crypto. Why chill the industry in its infancy and send it (and the taxes associated with it) offshore?

Coinbase, as the largest U.S. exchange, agrees with the need for information reporting of crypto. We want people to pay all taxes required under the law. We are building systems and protocols for information reporting in response. While we continue to wait on Congress and the IRS to act, we will do our best to provide our customers with the information they need to comply with their personal reporting obligations.

We are rolling out a Tax Center for our customers in the coming month, with the goal of providing education, guidance, support, data, and historical transactional information. It’s hard to do this in practice, and it can’t be done overnight, but we are confident that we will get there and be best in class. Our customers want to be compliant with their tax obligations and have asked for this guidance and support.

We invite meaningful dialogue and discussion to set the appropriate regulatory parameters for our industry. We have offered this at every turn to both legislators and the IRS. The bipartisan leadership demonstrated by Senators Wyden, Lummis, and Toomey in offering their amendment to help resolve this unnecessary confusion underscores exactly how impactful meaningful dialogue can be.

Our response to a recent editorial from Bloomberg on Congress’s crypto tax proposalCryptocurrency Trading Signals, Strategies & Templates | DexStrats

Our response to a recent editorial from Bloomberg on Congress’s crypto tax proposal was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Our response to a recent editorial from Bloomberg on Congress’s crypto tax proposal
DexStrats 22 August, 2021
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