- The key issue is the definition of “brokers” in the tax code. Under the tax code, brokers are generally required to collect detailed information on their customers, enabling them to issue 1099 tax returns. The new infrastructure bill, in an attempt to give the IRS broad authority to require the reporting of information on cryptocurrency transactions, broadens the definition of broker to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The debate that has played out over the past two weeks concerns this definition, with the Wyden-Lummis-Toomey amendment making it explicit that validators and software developers are not “brokers.”
- By trying to keep the definition of “brokers” broad, other amendments pick technology winners and losers. Some of the proposed fixes have specifically exempted blockchain validators using proof-of-work (the technology that powers Bitcoin) and sometimes proof-of-stake (another common consensus mechanism). There are many consensus mechanisms beyond these two. The point of consensus mechanisms is that they create incentives for communities to come together and build mutual trust. Congress should not be in the business of choosing which forms of trust (which technologies) require stakeholders to gather information and issue tax returns, and which forms are exempted from this requirement. Doing so stifles experimentation with a new, participatory, and decentralized alternative to our current centralized tech system.
- Software developers should not be considered “brokers.” Aside from the issue of validators, the “broker” definition potentially captures individual software developers who are in the business of creating platforms on which people share NFTs such as digital art and game collectibles. Deploying code and getting paid to do so should not make you liable for providing tax returns to the people who use your platform.
- Crypto is not a monolith, and much of the emerging technology is non-financial. The definition of “brokers” ignores the fact that much (and soon, most) of the crypto world is not about people trading financial instruments. To take just a few examples: massively popular games, trading platforms for digital art, and low-bandwidth wireless networks are deploying blockchain technology and have very little to do with tax evasion or capital gains. Requiring the teams behind these exciting new projects to collect detailed information on their users and provide tax returns as if they were brokers of financial instruments would stifle innovation.
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