IRS Should Focus on Centralized Exchanges: Blockchain Exec

It’s been two years since most people thought about what Kristin Smith says will be the “biggest regulatory item of the year.”

The executive director of the Blockchain Association was referring to the bipartisan $1.2 trillion infrastructure plan that President Joe Biden signed into law on November 15, 2021. With it, he created a new tax rule that redefines a “broker” as “any person responsible for regularly providing any service that carries out transfers of digital assets on behalf of another person.”

At the time the crypto industry worried that it would include miners, developers, stakers and others who do not have a typical customer relationship with the individuals whose transactions they help facilitate.

In 2021, tax experts said there wouldn’t be much the crypto industry could do until the Internal Revenue Service figured out how it wanted to implement the rule. At the time, they estimated that it would take at least two years before anything happened.

Now, here we are.

“We expect the IRS to address this this year,” Smith said during an interview at GM Decrypt podcast. She added: “I think the IRS are reasonable people. Will it get me in trouble for saying that?”

If the Blockchain Association gets its way, tax authorities will focus on requiring centralized exchanges to collect tax information from their customers.

“Our hope is that they focus on that because obviously it will be very difficult if they start [with] miners and validators and software providers, who help with the operation of a transaction but don’t actually take control of customers’ funds,” Smith said. “It will be impossible for them to comply.”

When the spending plan was first introduced, Senators Cynthia Lummis (R-WY), Ron Wyden (D-OR) and Pat Toomey (R-PA) proposed an amendment that would have changed the language to specify that miners, developers and network validators were not included in the “broker” definition.

Their change had the support of Coinbase, Block, Inc. (formerly Square), Ribbit Capital, Coin Center and the Blockchain Association itself.

Calling the provision as written “too broad and vague,” Coinbase released an official statement saying crypto “should not be subject to potentially damaging legislation without public participation and public comment.”

“We support reasonable reporting requirements that are consistent with those applicable to traditional financial services,” the company wrote.

But in the end, the amendment failed to garner enough votes, leaving in place a provision that Coinbase said would mean “a massive increase in financial monitoring.”

Now Smith hopes the IRS will implement the rule the way Sens. Lummis, Wyden and Toomey wanted in writing. She said the rulemaking is likely to play out over several rounds of proposed implementations by the IRS — followed by invitations to industry and tax professionals to comment — before anything is finalized.