The crypto world has been bracing for a tax crackdown from the Treasury Department for more than a year-and-a-half, ever since Congress approved new rules aimed at making it easier for the IRS to determine how much money people make trading virtual currencies.
Since then: silence.
Though the IRS considers crypto a major source of tax avoidance, not even a first draft of the regulations needed to fill in the details of the new transaction-reporting requirements has been released by the administration.
Adding to the mystery is that the rules appear to have been written, having been blessed months ago by the White House budget office — which, until recently, was one of the last bureaucratic steps in the process of issuing regulations.
In the meantime, the start date for the rules has been put off indefinitely.
That has perplexed many, from members of Congress to lawyers like Lisa Zarlenga, a cryptocurrency tax expert at Steptoe.
“This is the single easiest thing they can do to improve compliance, and they’re not doing it,” said Zarlenga, a former Treasury tax official.
“I’ve been scratching my head.”
The IRS’s tortoise-like pace contrasts with the aggressive campaign to clamp down on crypto being waged by the Securities and Exchange Commission, which has sued to force industry giants Coinbase and Binance to follow its regulations.
The delay also comes amid a high-profile push by the administration to reduce the estimated $500 billion in taxes that go uncollected every year, a big reason why Democrats pushed through a one-time $80 billion cash infusion for the IRS.
The tax agency had been asking lawmakers for the new crypto rules for years, saying it needed more power to root out tax avoidance by people trading digital assets.
During the debt-limit negotiations, President Joe Biden complained that Republicans wouldn’t agree to a second crackdown dealing with so-called wash sales that would prevent crypto holders from using paper losses to erase their tax bills.
In a statement, Treasury spokesperson Kristin Lynch said: “Treasury is working diligently to finalize these important and complicated regulations.”
She did not respond to questions about the reasons for the delay or when the rules might be released
The still-gestating regulations could be controversial for the agency, reviving a contentious fight like the one seen in Congress when it first approved the rules.
At the time, in 2021, lawmakers were deeply divided, even within each party, over what corners of the digital asset world should be subject to the requirements. Odd bedfellows like Senate Finance Committee Chair Ron Wyden (D-Ore.) and Sen. Cynthia Lummus (R-Wyo.) said the rules went too far.
Lawmakers wanted the $28 billion the crackdown was projected to raise to help defray the cost of an infrastructure spending bill.
Congress left many of the details to be sorted out by Treasury, and those with a stake in the issue are now anxious to see whether the rules apply not only to obvious targets like Coinbase but also things like decentralized exchanges, people who make “cold wallets” and miners.
The IRS already requires people to report crypto transactions on their annual returns. And to underscore that point, the agency began requiring people to say on their filings whether they owned virtual currencies at any point in the year (in 2021, 2.3 million filers answered “yes”).
But the agency does not have an easy way to determine whether what the taxpayer reports on a return is true or complete, having to resort to audits and John Doe summonses to exchanges for the information. It’s such a big problem that experts have trouble even estimating how much in crypto-related taxes go uncollected.
That’s where the rules approved by Congress come in. They require brokers to report to the IRS, as well as their customers, how much they saw in gross proceeds from selling digital assets.
The idea is to not only provide the IRS with independent data about transactions. If people know someone else is reporting to the IRS, they are less likely to omit the information from their returns.
That’s been part of Washington’s tax-collection playbook for more than 30 years, with lawmakers repeatedly expanding such “third-party reporting” to an ever-widening circle of payments. The IRS now collects more than 50 “informational” returns detailing how much people are paid at their jobs and how much they made selling stock and how much interest they paid on their mortgage.
Advocates say expanding those requirements to crypto would not only improve tax collections. It would also make it easier for people holding digital assets to do their taxes, especially if they are frequent traders because they won’t have to track each individual sale.
The rules were supposed to take effect in January, but the administration announced late last year they would be delayed.
The rules were OK’d by the White House Office of Information and Regulatory Affairs in February, which had been one of the final steps in issuing regulations. The administration recently announced OIRA will no longer review tax regulations.
Even once the rules are released, they’ll only be the initial draft — the administration still must take public comment on them before finalizing the requirements. Some experts predict the agency won’t make them effective in the middle of a tax year because that would cause too many headaches, which means the start date could be a long way off.
Critics complain that amounts to a windfall for the crypto world.
At a recent House Financial Services Committee hearing, Rep. Brad Sherman (D-Calif.) asked Treasury Secretary Janet Yellen when the rules might be released.
“The SEC has proved they’re not afraid of the crypto bros, I know you’re not afraid of the crypto bros, I hope the IRS is not afraid of them — when are we going to see these regulations?” asked Sherman, ranking member of the panel’s subcommittee on capital markets.
Said Yellen: “We’ll get back to you on that shortly.”
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