IRS Proposes Unprecedented Data-Collection on Crypto Users

IRS Proposes Unprecedented Data-Collection on Crypto Users – The IRS aims to mandate that cryptocurrency service providers collect extensive user data, such as names and Social Security numbers, in compliance with the Infrastructure Investment and Jobs Act. This law introduced new reporting requirements, which posed a potential threat to cryptocurrency mining and could have exposed many Americans to felony charges. 

Fortunately, the IRS’s 300-page proposal is not as severe as it could have been under the law, though it remains questionable policy. As individuals, businesses, and advisors prepare their response letters before the October 30 deadline, it’s crucial to question the default requirement for businesses to report customers to the government.

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Reflecting on 2021, the Infrastructure Investment and Jobs Act initially focused on infrastructure development like roads and bridges, not on cryptocurrency or financial reporting. It was only when there was a pressing need for funding to offset expenditures that Congress included two provisions to enhance financial monitoring of cryptocurrency users, with the rationale that increased surveillance would boost tax revenue, implying potential tax evasion among cryptocurrency users.

Initially, the Joint Committee on Taxation projected that these provisions would generate approximately $28 billion in tax revenue over a decade. Efforts to eliminate the contentious reporting requirements were met with resistance, as there was no viable alternative for replacing the funding. The accuracy of the $28 billion estimate was dubious from the outset. 

Less than a year later, the Biden administration presented its budget, which provided a significantly contrasting forecast. Instead of the $28 billion anticipated by the Joint Committee on Taxation, the Biden administration projected that only $2 billion would be collected over the next 10 years. Even this revised figure may be overly optimistic, as Treasury officials acknowledged that the estimates were based on a vastly different market environment.

Given the absence of cost-offsetting, what remains seems to be merely another component in the broader framework of U.S. financial surveillance. Once more, the IRS’s proposal doesn’t seem as severe as it might have been, as it currently exempts miners and certain software developers. Nonetheless, the proposal raises concerns regarding the criteria used to determine which entities are obligated to report their customers.

The premise seems to be partly based on “whether a person is in a position to know information about the identity of a customer, rather than whether a person ordinarily would know such information.” The proposal states that this distinction is made because some platforms “have a policy of not requesting customer information or requesting only limited information [but] have the ability to obtain information about their customers by updating their protocols.”

For this reason, the proposal states that the IRS expects some decentralized exchanges and selfhosted wallets may be forced to report their customers’ private information. In other words, even though businesses may have no reason to collect sensitive, personal information from customers, the baseline that the IRS is working with is whether they have the ability to do so. That may be somewhat limited given the focus is on businesses providing a service, but “the ability to collect information” seems to be little more than “collection by default.”

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While it is understandable, this approach should not be unexpected. The U.S. government has gradually expanded its financial reporting requirements through legislation such as the Bank Secrecy Act and the Patriot Act. The provisions in the Infrastructure Investment and Jobs Act, along with the IRS’s ensuing proposal, are the latest extensions of this expansive framework.

Instead of continuing to broaden financial surveillance, it is a crucial moment to question the entire premise. In a nation where Americans should be protected by the Fourth Amendment, businesses should not be obligated to report their customers’ information to the government as a default practice. 

Everyday activities like using cryptocurrency for transactions, receiving more than $600 on PayPal from a garage sale, or receiving a paycheck should not automatically result in inclusion in a government database. Shifting away from this status quo surveillance may necessitate substantial changes to U.S. law, but it is not an extreme idea. 

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A survey by the Cato Institute revealed that 79 percent of Americans find it unreasonable for banks to share financial data with the government, and 83 percent believe the government should require a warrant to access financial information. These principles should serve as the guiding principles for the ongoing discussion. As the October 30 response deadline approaches, those providing comments should consider both what the proposal entails and what it omits.

Furthermore, although the focus is currently on the IRS, it’s important not to overlook the fact that the responsibility for addressing the existing situation and the broader financial surveillance framework ultimately rests with Congress. In the end, the IRS is simply executing what Congress has mandated. Therefore, Congress must take the lead in reforming the entire system.

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