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Lawmakers Want to Clarify Who Will Need to Report Crypto Gains to the IRS

When the bipartisan infrastructure bill passed earlier this month with a controversial crypto tax provision still included, many in the industry were banking on a quick fix from lawmakers who were sympathetic to concerns that the new rule was too broadly defined. 
The current provision requires all "brokers" to report crypto gains to the IRS, while expanding the definition of broker to potentially include miners and software developers, rather than just centralized crypto exchanges, which were the clear target of the legislation.
Representatives Patrick McHenry (R-N.C. 10 District) and Tim Ryan (D-Ohio 13th District) took the first step in making that course-correction last Thursday with the introduction of the "Keep Innovation in America Act," which narrows the language of the requirement. 
The Treasury Department pushed for the requirement to help close the tax gap in the crypto industry by forcing better IRS reporting, but legislators on both sides of the aisle argue that the language is too broad and could curb innovation in the space. 
"We have to figure out how to balance consumer protections and reasonable oversight while simultaneously providing these technologies and companies with the necessary space they need to grow, innovate and democratize the financial sector," Ryan said in a statement. "I'm committed to finding that balance, and I believe the McHenry-Ryan legislation is the best path to get us there."
Among other things, the new bill would narrow the definition of broker and give those entities that are defined as brokers an additional two years to start reporting to the IRS. 
"I think that is a really well thought out piece of legislation," Kristin Smith, CEO of the Blockchain Association, an industry lobbying group, told Cheddar. "We were super excited to see such strong bipartisan support for the bill." 
Other supporters include Kevin Brady (R-Texas 8th District), Ro Khanna (D-Calif. 17th District), Tom Emmer (R-Minn. 6th District), Eric Swalwell (D-Calif. 15th District), Warren Davidson (R-Ohio 8th District), Anthony Gonzalez (R-Ohio 16th District) and Ted Budd (R-N.C. 13th District). 
While Smith is optimistic given the bill's bipartisan support, it's unclear how quickly it could get passed and whether it will come before Treasury starts the rulemaking process. 
"Unfortunately, I don't see anything in the short term," Smith said. "I do think that the Treasury Department is going to want to work pretty quickly on their rulemaking and try to get the ball rolling on getting this legislation enacted, but the provisions in the legislation don't actually formally go into effect until 2024."
In other words, the full brunt of the crypto tax requirement won't be felt for at least another three years, but Treasury will likely get started on the rulemaking process almost immediately. 
In Smith's view, it would be better to pass the new bill clarifying the legislation now, rather than leaving it up to Treasury to interpret the bill as they please. 
She noted that she's not seeing any direct resistance to the McHenry-Ryan bill at the moment, but that Treasury has made clear in past negotiations that it's interested in a broad interpretation of the provision, so that it has flexibility in figuring out how to regulate the crypto industry.  
"What I think Treasury wants to do is give itself the most flexibility to address these issues going forward, but unfortunately we think that flexibility goes too far and captures entities that absolutely won't be able to comply," she said. 
As others in the industry have argued, centralized exchanges such as Coinbase, Kraken, and Gemini have customer information, which they can then share with the IRS, while decentralized exchanges don't have customer information and would effectively not be able to comply.
For the former at least, the industry is well prepared to accept a crypto tax requirement.
"Cryptocurrency users are not just willing to pay their fair share of taxes, but for years we've been asking the Treasury Department for guidance on third-party reporting from cryptocurrency exchanges," said Jerry Brito, executive director of the Coin Center, in a statement. "Unfortunately, the reporting rules rushed through in the infrastructure bill massively overreach."
There's a chance, however, that Treasury could decide to interpret the law more narrowly. 
"It might be that Treasury comes in and chooses to very narrowly interpret the authority that the infrastructure bill gives them, in which case, maybe this won't be as big of a problem," Smith said. "But the problem right now is that there's the potential for it to be interpreted incredibly broadly." 
Senators Cynthia Lummis (R-Wyo.) and Ron Wyden (D-Ore.) also introduced a bill this month to adjust the language in the infrastructure bill.
"Our bill makes clear that the new reporting requirements do not apply to individuals developing blockchain technology and wallets," Wyden said in a statement. "This will protect American innovation while at the same time ensuring those who buy and sell cryptocurrency pay the taxes they already owe."
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