Congressmen push for crypto reporting regs to close Tax Gap

June 6, 2023
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Photo by Art Rachen on Unsplash

News has not been good of late for crypto fans.

The Securities and Exchange Commission last night (June 5, 2023) filed an emergency motion in federal court asking a judge to freeze assets in Binance's two U.S. holding companies. The SEC contends that the world’s largest cryptocurrency exchange mishandled funds and lied to regulators.

The SEC followed that today by suing Coinbase, alleging that the largest crypto exchange in the United States violated rules that require it to register as an exchange and be overseen by the federal agency.

Now, two Democratic congressmen are urging U.S. Treasury and the Internal Revenue Service to implement regulations to ensure that the crypto industry is tax compliant.

Tax evasion issues: Rep. Brad Sherman, who represents part of Los Angeles County, and Rep. Stephen Lynch, whose district includes southern Boston and many of that area's suburbs, argue that the lack of crypto oversight has led to a growing Tax Gap. That's the same position taken by a previous IRS commissioner.

"We write to express our deep concern about the state of tax compliance by the cryptocurrency industry," say the two House members in their June 5 letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel. "For years now, that industry has been a major source of tax evasion and a significant part of the nation's tax gap."

Sherman and Lynch both serve on the House Financial Services Committee. Sherman is Ranking Member on the committee's Subcommittee on Capital Markets. Lynch is Ranking Member of its Subcommittee on Digital Assets, Financial Technology and Inclusion.

Watchdog warning years ago: The pair cite a September 2020 Treasury Inspector General for Tax Administration (TIGTA) audit that found the lack of specific third-party crypto reporting makes it difficult for the IRS to identify taxpayers with virtual currency transactions.

"While [crypto] exchanges are in a to provide important information for use by the IRS in tax administration, information reporting on virtual currency transactions from the exchanges is lacking," noted the TIGTA report.

In the virtual asset world, as in all other areas of taxable transactions, the lack of third-party data leads to less tax compliance.

"The IRS estimates that tax compliance is approximately 95 percent when there is substantial information reporting, and when there is substantial information reporting combined with tax withholding, tax compliance is estimated to be 99 percent," according to TIGTA. "However, tax compliance drops to 45 percent when there is little or no information reporting or withholding."

Recommendations (and law), but still no action: However, since TIGTA's investigation three years ago, little practical progress has been made on crypto reporting, despite enactment of crypto reporting rules in the 2021 Inflation Reduction Act.

The law called for cryptocurrency brokers to begin tracking and reporting their customers' transactions for tax reporting purposes in 2023. But in late December 2022, note Sherman and Lynch, the Treasury Department put that requirement on hold pending issuance of final regulations about the reporting law.

"It is now May, and the proposed regulations have yet to be promulgated," the Representatives chided Yellen and Werfel.

"The cryptocurrency industry had all of 2022 to prepare for the infrastructure law's tax reporting requirements and now it apparently gets 2023 off as well," Sherman and Lynch add in their letter. "We hope Treasury/IRS will promptly release the proposed regulations so we can close the tax gap and bring the cryptocurrency industry into full tax compliance."

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