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IRS Proposed Crypto Regulations Are Unworkable


On November 13, we testified at an Internal Revenue Service hearing on their proposed cryptocurrency regulations. These regulations would establish gross proceeds and basis reporting requirements by digital asset brokers and standards of determination for amount realized by digital asset transactions,  stringently defining a digital asset as stock regardless of how they are used, and mandate a strict taxation scheme. If implemented, this proposed regulation will harm taxpayers and create mass confusion over compliance questions.

In our comments, we stressed the IRS’s attempt to tax digital assets akin to that of physical stocks is outdated. Digital assets are wholly digital, and as we said, the “IRS should consider an innovative approach which blends the regulation methods used for the stock market, IT approaches, and cybersecurity methods to create a modern, twenty-first century method of regulation.”

We warned that taxpayers would face harm from the regulation’s attempt to treat the disposition of a digital asset for a different asset as a capital gains tax. Such a taxation scheme “ignores the virtual and volatile aspect of cryptocurrency.” The lack of regulations governing the crypto industry increases the likelihood of dramatic losses by taxpayers, thus potentially subjecting them to large tax bills. Additionally, the regulation incorrectly defines digital assets as stocks, ignoring that digital assets can be used by people to buy consumer goods.  

The regulation is riddled with poorly defined terms and litigation traps. For example, as written, it sets “fair market value” as the standard for determining the value of property and services received for digital assets. Such an approach not only ignores the agreed-upon contract price, but is also misguided, as the IRS is often entangled in lawsuits over what is considered “fair market value.” The regulation mandates the transaction costs of a digital asset exchange be split 50/50, ignoring any contractual agreement to the contrary. Finally, the regulation’s blanket treatment of digital assets as stock is against case law to the contrary.

When we testified, we urged the IRS to consider the innate differences between digital assets and physical stock. One such method for doing so is for the IRS to develop regulations through a sandbox method—a group of experts in digital assets, stock, taxation, regulations, and related fields  who could propose appropriate cryptocurrency regulations. The IRS also could only tax digital asset users upon cash-out, create a group of digital asset experts to assist in the implementation of its regulations, or postpone any taxation attempt until digital assets are regulated.

We will continue to fight for appropriate tax regulations and protect taxpayers in this space. Stay tuned for any further updates.