Coinbase Challenges IRS Crypto Tax Proposal: Privacy and Reporting Worries

Coinbase, the largest cryptocurrency exchange in the United States, has voiced serious concerns over a recent proposal from the U.S. Internal Revenue Service (IRS) related to cryptocurrency taxation. In a comment letter to the IRS, Coinbase argued that the proposed rule, which aims to define crypto brokers and establish guidelines for tax reporting, poses significant risks to the cryptocurrency industry and the privacy of Americans.

Coinbase Key Concerns:

1. Unprecedented and Invasive Surveillance: Coinbase expressed alarm over the proposed rule’s potential to create “an unprecedented, unchecked, and unlimited tracking on the daily lives of Americans.” The exchange argues that the rule could lead to extensive and intrusive surveillance that poses risks to individuals’ privacy.
2. Complex Reporting Requirements:Coinbase believes that the proposed rule introduces “incomprehensible and unduly burdensome” reporting requirements. These requirements could overwhelm the industry and displace services that the IRS aims to enhance. The exchange expressed concerns about the rule’s complexity and its impact on taxpayers.

The Blockchain Association’s Previous Concerns:

The Blockchain Association, a U.S. cryptocurrency advocacy group, had previously warned that adopting such provisions could potentially harm the cryptocurrency industry in the United States. Coinbase’s stance aligns with these concerns, emphasizing the potential negative consequences of the rule.

IRS’s Perspective on Crypto Tax Gap:

Prior to Coinbase’s comment letter, the IRS addressed the issue of the “tax gap,” referring to the shortfall in tax revenue that the agency should collect but currently isn’t. The IRS highlighted cryptocurrency as part of the growing problem, noting that it’s challenging to account for noncompliance, particularly in the area of digital assets and cryptocurrency.

Treasury Department’s Proposed Rule:

In August, the U.S. Treasury Department published a nearly 300-page proposed rule as part of its efforts to comply with the 2021 Infrastructure Investment and Jobs Act. This rule outlines reporting obligations for various entities in the cryptocurrency ecosystem, including centralized exchanges, payment processors, hosted wallet providers, decentralized exchanges, and entities involved in the redemption of crypto tokens.

Senators’ Perspective on Rule Implementation:

A group of Democratic senators, led by Sen. Elizabeth Warren, wrote a letter to the IRS, advising the agency to resist industry complaints. Their primary concern was that the proposed rules might take too long to go into effect, potentially disadvantaging law-abiding Americans and causing the federal government to lose significant tax revenue. They urged the IRS to implement the rule as swiftly as possible.

Coinbase’s Request to the IRS:

Coinbase urged the IRS to reconsider its proposal and rewrite it with a focus on “limiting compliance requirements to those parties that directly effectuate transactions in digital assets similar to those in traditional finance.” The exchange’s request underscores the importance of crafting a tax framework that supports the growth of the cryptocurrency industry while ensuring tax compliance.