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Treasury, IRS urged by Members of Congress to help with crypto tax compliance

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(Kitco News) - Two members of the U.S. House of Representatives are pushing for the Treasury Department and the Internal Revenue Service (IRS) to help the government collect the taxes owed by digital assets companies.

Brad Sherman, Ranking Member of the Subcommittee on Capital Markets, and Stephen Lynch, Ranking Member of the Subcommittee on Digital Assets, Financial Technology and Inclusion, wrote a letter to Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel on Monday urging them to help close the tax gap by bringing crypto firms into compliance.

“We write to express our deep concern about the state of tax compliance by the cryptocurrency industry,” they said. “For years now, that industry has been a major source of tax evasion and a significant part of the nation's tax gap.”

Sherman and Lynch wrote that in September 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued a report claiming that “[t]he IRS cannot easily identify taxpayers with virtual currency transactions because of the lack of third-party information reporting that specifically identifies virtual currency transactions.”

In 2021, Congress passed the Infrastructure Investment and Jobs Act (IIJA), which required crypto brokers to begin tracking and reporting customers’ crypto transactions on behalf of the IRS. “The law clearly states that taxpayers should begin receiving 1099s for tax filing year 2023,” they said.

But in December 2022, the Treasury Department told cryptocurrency brokers they would not have to track customer transactions “until it issued final regulations about this requirement.” They said that Treasury completed its review of the regulations in February. “It is now May, and the proposed regulations have yet to be promulgated,” they wrote.

“The cryptocurrency industry had all of 2022 to prepare for the infrastructure law's tax reporting requirements and now it apparently gets 2023 off as well,” the Congressmen said. “We hope Treasury/IRS will promptly release the proposed regulations so we can close the tax gap and bring the cryptocurrency industry into full tax compliance.”

Not all their fellow members of the House are quite so eager to see the IRS with more power over crypto, however. In March, a bipartisan group of U.S. lawmakers co-led by House Financial Services Committee Chair Patrick McHenry and Rep. Ritchie Torres announced plans to reintroduce legislation that would reform the crypto tax reporting provisions that were first introduced in 2021’s IIJA. The lawmakers want to change the Keep Innovation in America Act by narrowing the definition of a crypto ‘broker’ for tax purposes.

Based on a draft of the bill, the requirement for brokers to report on digital asset transactions worth more than $10,000 to the Internal Revenue Service would be pushed from 2024 to 2026. The terminology has also been altered so that “miners and validators, hardware and software developers, and protocol developers” are not considered to be brokers.

At the time the bill was first introduced, crypto advocates said that the law’s treatment of digital assets would burden non-financial firms like crypto miners and certain software providers with “impossible-to-fulfill reporting requirements.”

The updated draft bill addresses those concerns and goes a step further by applying significant limits to the federal government’s ability to define what a ‘digital asset’ is. The IIJA originally gave the Treasury Department discretionary power to define digital assets, but the changes to the Keep Innovation in America place limits on that power.

According to Rep. McHenry, the bill rectifies “misguided policy and regulatory overreach [that] threatens to push this dynamic industry – and its potential benefits – overseas.”

And later in March, Treasury and the IRS issued new guidance on non-fungible tokens (NFTs) and asked for feedback on their plan to tax them as collectibles.

NFTs have seen a significant rise in popularity since the bull market of 2021, with billions of dollars’ worth of transactions happening on NFT marketplaces like OpenSea, LooksRare and Blur.

There are also numerous accusations of rampant wash trading and money laundering occurring via NFT markets, leading the industry to become a point of focus for global regulators looking to clamp down on illegal activities.

The IRS and Treasury appear to be particularly concerned about the purchase of NFTs in retirement accounts and the dangers they pose to the long-term financial health of retirees.

Interested parties can provide comments to the IRS until June 19 on topics such as when an NFT is considered to be a work of art.

The IRS has been making a concerted effort to regulate the crypto industry in recent months. In October, the tax collector released a draft bill proposing the addition of a well-defined Digital Assets section to the 2022 IRS tax forms that included detailed guidance on how to report on cryptocurrencies and nonfungible tokens (NFT).

And in November, reports emerged that the agency's criminal investigation (CI) division was gearing up to bring the hammer down on crypto tax evaders and was building hundreds of cases focused on things like “off-ramping” transactions, where digital assets are exchanged for fiat currency, as well as people being paid for work in crypto and not reporting that income on their taxes.

According to IRS special agent Thomas Fattorusso, who is in charge of IRS-CI’s New York field office, “Cryptocurrency is here to stay,” so the tax-collection agency is looking to partner with the crypto industry to fight financial crime.

Fattorusso said the agency could not take a hostile approach to the technology and instead must embrace it since “it isn’t going anywhere anytime soon and it’s becoming more legitimate as the years roll on,” along with becoming more sophisticated.

He stressed that it is a goal of the IRS to work towards getting more cooperation from crypto companies and developing a non-contentious relationship that is more symbiotic than oppositional. “It helps them in their legitimacy. This is a new industry for everybody. I think we’re still trying to feel our way around it. The companies are feeling their way around it.”

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