IRS Proposal May Increase Financial Surveillance in Cryptocurrency Market
Summary:
The Internal Revenue Service's (IRS) almost 300-page proposal interpreting the Infrastructure Investment and Jobs Act introduces new reporting norms for the cryptocurrency market. Far from imposing an outright ban on cryptocurrency mining, the proposal may compel businesses to disclose customer information. It suggests that those able to secure customer data should report it as default. Criticisms suggest that forcing businesses to report customer data to the government is not in line with the Fourth Amendment and that the legislation shows an inclination towards increasing financial surveillance. As lawmakers and businesses prepare for the October 30 response deadline, many believe the solution lies with Congress.
The cryptocurrency sector has attentively followed the Internal Revenue Service's (IRS) approach to the Infrastructure Investment and Jobs Act for two years. Essentially, the act introduced reporting norms that potentially outlawed cryptocurrency mining and put numerous U.S. citizens at risk of newly-defined felonies. Thankfully, the IRS’s proposal, spanning nearly 300 pages, isn't as severe as feared. That said, it is far from being outstanding policy. As the October 30 deadline for public consultation approaches, one must reflect on the rationale behind obligating businesses to automatically report client data to government entities. The original intent of the Infrastructure Investment and Jobs Act was to facilitate the construction of physical infrastructure such as roads and bridges, it had nothing to do with cryptocurrency or fiscal reporting. Cryptocurrency surveillance was later inserted into the bill by Congress members in order to generate additional fiscal income, implicitly accusing cryptocurrency users of tax evasion.
During the initial phase, the Joint Committee on Taxation predicted these provisions would produce approximately $28 billion in tax revenue over a decade, and hence, initiatives to remove the disputed reporting requirements were turned down owing to lack of funding alternatives. This projection was disputed from the outset, but less than a year later, it seems vastly overrated as President Biden's administration's budget indicates a substantially lower revenue estimate of only $2 billion over the next decade. Treasury officials have also conceded a potential overestimate considering the rapidly shifting cryptocurrency market environment.
However, the IRS's proposal isn't as alarming as expected as it excludes miners and certain software developers, although it does appear to insistently prescribe who should be mandated to report customer data. It suggests that the deciding factor should be whether a person can obtain information about a client's identity, rather than whether they would normally have such information. Consequently, some decentralized exchanges and self-hosted wallets could be compelled to disclose customer information.
Despite the absence of a requirement for businesses to gather sensitive customer data, the IRS seems to determine that possessing the capacity to secure such data should be the primary measure. While this could be somewhat restricted to service providers, the criterion indicates a default data-collection orientation. This isn't surprising considering the U.S. Government's evolving financial reporting norms under laws such as the Bank Secrecy Act and the Patriot Act. Provisions introduced by the Infrastructure Investment and Jobs Act and the subsequent IRS proposal are simply the latest expansions of this framework.
However, it's time to discontinue broadening and deepen financial surveillance and reevaluate the whole premise. It's inappropriate in a country with the Fourth Amendment to force businesses to default to reporting customer activities to the government. Using cryptocurrency for transactions, receiving more than $600 after a garage sale, or registering income from a job shouldn't automatically enlist someone in a government database. Moving away from this trend towards surveillance might necessitate significant modifications to the U.S. law; not a radical concept since a Cato Institute survey showed 79% of Americans deem it unreasonable for banks to share financial data with the government without a warrant and 83% believe the government should need a warrant to access financial information.
The onus is on Congress to address the current situation and the broader financial surveillance norms as they are the ultimate legislating body. The IRS is simply executing Congress's directives, and necessitates Congress to intervene and overhaul the whole system.
Nicholas Anthony, a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives and author of 'Questioning the Rationale for the Cryptocurrency Provisions' and 'Crafting a Better Framework for Financial Privacy in the Digital Age', offers this analysis as advice and not as a formal legal or investment guide. The views expressed are the author’s and do not reflect the views or opinions of Cointelegraph.
Published At
10/23/2023 6:01:16 PM
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