Crypto Rules Delay Puts Billions in Tax Revenue at Risk
Democratic senators are pressing Biden administration to speed up release of regulations tied to 2021 law
Implementation of a law to catch crypto tax cheats is delayed inside the Treasury Department, putting billions of dollars in federal revenue at risk and frustrating members of the president’s own party.
The department missed its first deadline to implement a 2021 law in time for the current tax year. Now, following further delays, it might be close to too late for tax year 2024.
Closing a gap that can make it easier for cryptocurrency investors to dodge taxes was projected to raise $28 billion over a decade, but declining cryptocurrency prices might have altered that figure. The tax rules are part of the administration’s strategy of making crypto investors play by the same rules as others.
Now, Sen. Elizabeth Warren (D., Mass.) and three other senators are pushing the Biden administration to move quickly.
Tax evaders could exploit loopholes, senators say
“These new rules were urgently needed when President Biden signed them into law in 2021. Over the past two years, that urgency has only intensified,” Warren, Bob Casey (D. Pa.), Richard Blumenthal (D., Conn.) and Bernie Sanders (I., Vt.) wrote to Treasury officials this week. “Given the chance, tax evaders and the crypto intermediaries willing to aid them will continue to game the system, exploit loopholes, and siphon off billions of dollars a year from the U.S. government. You must not give them that chance.”
Last December, the Treasury Department and Internal Revenue Service said that brokers wouldn’t have to report any information until the administration issues final rules addressing questions such as the definition of a broker. More than seven months later, Treasury hasn’t taken the first formal step of issuing a proposal, which would kick off a monthslong—or yearslong—process before those final rules are done.
“Treasury is working diligently to issue these important and complex regulations soon,” said Treasury spokeswoman Kristin Lynch.
“We’re almost at the point where the delay is overshadowing the regs themselves,” said James Creech, a San Francisco tax lawyer for accounting firm Baker Tilly. He said implementation for tax year 2024 would be an ambitious start date given the reporting systems that brokers will need to implement and test.
Definition of crypto broker contested
The tax rules were bitterly fought by the crypto industry when Congress wrote them into an infrastructure law in 2021. Some lobbyists said the law’s definition of a crypto broker was too vague.
A broad definition of broker could create a liability for crypto businesses that can’t comply, such as software developers, crypto miners and wallet providers, said Ji Kim, head of global policy at the lobbying group Crypto Council for Innovation.
A group of lawmakers, including Senate Finance Committee Chairman Ron Wyden (D., Ore.), attempted to amend the law to narrow the definition, but those efforts failed. The rules, once implemented, will give the IRS more information about crypto investors’ profits and will inform investors that the IRS knows they have made money.
It will also make tax compliance easier for crypto investors who want to meet their obligations, and clear rules could make the industry more mature and standardized, said Creech, the tax lawyer.
“If you are trading crypto and you get the same 1099-B that you get from trading in a Schwab account, that’s a win for the industry and that’s a win for the taxpayer that wants to comply,” he said.
The dispute over the delayed tax regulation is part of the crypto industry’s broader lobbying war.
Crypto firms and their venture-capital backers argue that digital tokens such as bitcoin and ether, and the blockchain technology that underpins them, are revolutionary innovations that deserve to be treated differently from the rest of finance. They have spent tens of millions of dollars donating to political campaigns and lobbying Congress to write special provisions to accommodate their businesses.
Cryptocurrency’s emergence has challenged tax authorities, who struggled at first to fit it into typical categories. The IRS says cryptocurrency is property, not currency, so that profits from sales are taxed as capital gains. On enforcement, the IRS has tried to pierce the secrecy that is part of cryptocurrency’s core appeal.
The Biden administration has proposed further changes to tax laws governing cryptocurrency, including limits on so-called wash sales where investors can sell property, realize a loss and then immediately buy it back. Those proposals, which haven’t advanced in Congress, would raise more than $31 billion.