Wednesday, August 4, 2021
Daniel Hemel (Chicago; Google Scholar), Decrypting the Crypto Reporting Proposal in the Bipartisan Infrastructure Bill:
The bipartisan amendment to the infrastructure bill now working its way through Congress includes a new information reporting requirement for some cryptocurrency market actors—one of the few payfors in the package that is not purely an accounting trick. The current legislative language is quite broad, but a spokesperson for Senator Rob Portman (R-Ohio)—one of the amendment’s co-sponsors—has suggested that the drafters’ intent was much narrower. If the provision that ultimately passes is as narrow as Portman’s office suggests, then it will probably have a modest but positive effect on cryptocurrency tax compliance. The limited benefits still will be worth the cost, but the hard problem of cryptocurrency tax compliance won’t have been solved. ...
Defining the content and scope of cryptocurrency information reporting raises tough tradeoffs. Cryptocurrency—like cash—can facilitate tax evasion. It can facilitate good things too. It can enable customers to make cashless purchases from vendors without giving a sizeable cut to payment-card processors. It can allow individuals in the United States to send remittances to family members in low-income countries without paying high transaction fees. Moreover, onerous reporting requirements for wallet providers and other non-exchange actors might cause large swaths of an innovative industry to leave the United States. In an ideal world, Congress would carefully construct an information reporting regime for cryptocurrency that balances costs and benefits—after hearing from market actors, consumer and privacy advocates, academics, IRS officials, etc. Instead, the Senate is rushing to do it all in a matter of days before leaving town on a monthlong summer recess.
[N]ote that the inclusion of the cryptocurrency reporting provision comes days after the Senate decided to ditch a proposal for $40 billion of additional IRS funding over the next decade—apparently because many Republicans were uncomfortable with the idea of more audits. Instead of giving the IRS billions of dollars that the agency desperately needs, Congress now wants to give the IRS millions of information returns that the agency will find only moderately useful. If the IRS can figure out which of these Form 1099-CRYPTO filings merit follow-up—and if it has the resources to conduct additional thorough audits—then the reporting requirement might live up to senators’ optimistic revenue expectations. But lawmakers should not deceive themselves into thinking that they can achieve substantial cryptocurrency tax compliance gains while keeping the IRS on a starvation diet.