Congress just said it’s OK with cryptocurrency tax cheats #CriptoNews

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Last month, in an exceedingly rare act of bipartisanship, the Senate voted 70–28 to approve a House resolution to repeal the “DeFi Broker Rule.” The decentralized financial broker rule, which was adopted by the Treasury last December, would have required certain facilitators of crypto-assets transactions on so-called decentralized exchanges to make information reports to the IRS and issue their clients 1099 forms—just like any other financial institution.

The rule targeted “front-end service providers” who are in a position to require customers to identify themselves, collect their information, and deliver such information to the IRS. No unsuspecting individual “miners” or “stakers”—who participate in the validation process of blockchain transactions—would have been subject to these rules.

In celebrating the repeal, Ways and Means Committee Republicans criticized the Biden administration for introducing this “midnight” reporting rule, claiming it was done “last minute.” This language is taken straight from the press releases issued by the Blockchain Association, a blockchain industry group, decrying the rules back in December. But the DeFi Broker Rule wasn’t nearly as sensational as they made it seem.

These rules have been in development since 2021, when Congress passed the Infrastructure Investment and Jobs Act. The act subjected brokers of crypto assets to tax reporting requirements similar to those applicable to any other broker of financial assets, leaving the Treasury to craft regulations on the matter. In crafting the regulations, the department demonstrated a commendable level of cooperation with affected industries: The Treasury published proposed regulations for public comments in August 2023, and extended the comment period twice, until April 2024. This elicited 44,000 responses from the public. The final regulations included a 107-page preamble responding to these comments, even incorporating some of them into the final rules.

Importantly, the Infrastructure Investment and Jobs Act and the DeFi Broker Rule under it would not have created any new tax obligations. Taxpayers have always been required to report their taxable gains from crypto-asset transactions and pay taxes on them. The DeFi Broker Rule would have simply required front-end service providers to collect information on crypto-asset transactions and provide it to the IRS and customers. This was intended to make it easier for customers to properly calculate their tax liabilities and for the IRS to catch tax cheats.

However, the crypto industry claimed the new compliance burden would “stifle innovation” and drive blockchain businesses overseas. The reason, they argued, is that it would be impossible for brokers to comply with the rules, because, well, they are decentralized. This argument makes no sense. If the brokers are indeed decentralized and controlled by no one, what business exactly would be driven overseas? The reality is that the facilitators of most DeFi transactions are very much centralized, profitable, and controlled by a few identifiable operators. These operators can require their clients to provide tax information, but they specifically choose not to do so.

The argument about “stifling innovation” is also difficult to reconcile with the fact that the rest of the U.S. financial industry is subject to the same tax reporting requirements and seems to be doing just fine. The crypto industry is not vying for a level playing field, but for preferential treatment.

Even if we accept the argument that compliance with tax reporting requirements is too burdensome (specifically for crypto assets), the issue is not with the tax system: If one cannot build a profitable business without platforming tax cheats as an integral part of the business model, then the problem is with the business model and not the regulatory framework.

It is also worth noting that the threat to “move overseas” rings hollow given developments elsewhere in the world. Where exactly would these “innovative” (but decentralized!) businesses go? To the European Union, which has recently adopted a directive that subjects crypto-asset brokers to largely similar tax reporting requirements? Or to one of the 49 countries that recently signed on to the Organization for Economic Cooperation and Development’s “Crypto-Asset Reporting Framework,” which includes a binding multinational treaty imposing similar tax reporting requirements on crypto-asset brokers?

The DeFi rules were simply adopted to ensure taxpayers pay what they are already required to pay under existing tax law. They would not have imposed any new taxes and would not have burdened crypto businesses any more significantly than they already burden traditional financial businesses. I see no reasonable explanation for the attempt to repeal this rule other than favoritism, which the crypto industry was able to win through lobbying. Repealing the rule will simply make tax cheating easier when trading in crypto assets compared to other financial assets. It may also make it easier to cheat when trading in crypto assets in the United States compared with many other developed countries.

The United States is the world’s largest market for crypto investment. Congress may have just turned the United States into a destination of choice for those looking to evade taxes and other regulatory burdens on crypto transactions, potentially transforming it into one of the world’s worst, largest crypto tax havens. United States based crypto-assets services may now become a financial refuge not only for tax cheats, but also for others trying to secretly move their ill-gotten wealth, such as terrorists, drug lords, human traffickers, and dealers in child sexual abuse images.

Importantly, the cost of turning the United States into a crypto tax haven is not expected to come with any discernible benefits to the economy as a whole. If we believe the crypto industry, the industry is “decentralized,” so we should not expect any centralized investment benefit to accrue in the United States of all places. If the industry is not decentralized, then the new rules, as stated, would not have changed any existing tax burdens. It was all about enforcing existing laws. The repeal of the rule offers no tax cut that could reasonably be expected to attract new business into the United States.

The DeFi rules were workable. They made sense. They were directed at tax cheats. All that Congress needed to do to prevent the United States from descending into this tax-haven status was: nothing. Congress just needed to let the IRS do its job.

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