DeFi Tax, Stablecoin Tax? IRS's Cryptocurrency Tax Enforcement Sparks Debate

The proposal of the digital asset tax regulations released by the Internal Revenue Service (IRS) at the end of August has completed public comments in recent months and had its first hearing yesterday. The hearing extensively discussed challenges such as the difficulty of collecting tax data from DeFi platforms, controversies surrounding the taxation of stablecoins, and potential privacy concerns.

First Hearing on Proposed Digital Asset Taxation System Concludes

Coindesk reported that the proposed digital asset taxation system put forth by the U.S. IRS, which has reportedly garnered 124,000 public comments, is set to have a significant impact on crypto companies.

The feedback received revolves around concerns such as user privacy issues, the definition of crypto companies required to report tax information, taxation of stablecoins, and whether the proposal indirectly implies that digital assets fall under securities regulations.

Yesterday, the U.S. IRS and Treasury Department held their first audio-only hearing, gathering input from prominent figures in the crypto industry to present their arguments regarding the proposal. Here are the key points discussed.

Should DeFi Platforms Be Taxed?

Participants repeatedly questioned Marisa Coppel, a lawyer from the Blockchain Association, about the broad definition of brokers that need to report, including decentralized finance (DeFi) platforms or crypto wallets that may find it challenging to compile tax data. Coppel explained:

Tax reporting requires substantial data collection, and if there isn't a specific person who owns or controls the smart contract in DeFi platforms, it's challenging to obtain this information effectively.

Prior to this, the U.S. Tax Reform Association (ATR) had previously stated in their comment on the proposal that the IRS might compel all DeFi platforms and decentralized autonomous organizations (DAOs) to submit difficult-to-organize transaction data:

The IRS aims to bring DeFi into taxable entities to ensure other companies don't convert to DeFi platforms to evade tax requirements.

It was also mentioned that the proposal leans towards a broad definition of taxable entities, including entities like DeFi platforms that cannot provide complete tax information.

Taxation of Stablecoins?

The government team inquired about whether it is advisable to report assets that do not show gains or losses, such as stablecoins, and asked Coinbase's VP of Tax, Lawrence Zlatkin, about the definition of stablecoins. Zlatkin responded:

Generating tax statistics, including stablecoins, in the absence of gains or losses, would result in voluminous but less substantively valuable reporting.

He further added that the IRS should not and does not need to monitor every transaction of digital assets.

Additionally, the IRS itself acknowledged that the proposal could lead to billions of dollars in additional annual tax filings, potentially burdening institutions that were already struggling.

Regarding reporting requirements for stablecoins, it has been a contentious issue, with crypto industry players arguing that treating these transactions as taxable asset exchanges is unfounded. Stablecoins are tokens pegged to stable assets like the US dollar or euro and are used as a means of exchange in the digital asset space.

Privacy Concerns

In the aspect of user privacy, IRS officials questioned a lawyer specializing in U.S. financial KYC regulations on the internal workings of digital identity systems that maintain user anonymity and discussed the technology of privacy tokens and their adoption in the industry.

Zlatkin had previously mentioned in his comment that the proposal would lead to unprecedented and unrestricted tracking of transaction privacy in Americans' daily lives.

Moreover, the government team asked representatives of transaction information aggregators if they could link user wallets to calculate their tax obligations, and how to determine the cost basis of assets and improve the consistency and accuracy of tax information.

Shehan Chandrasekera, Head of Tax Strategy at CoinTracker, suggested that the IRS could consider introducing standards to guide their actions.

IRS: Regulations Remain Flexible

During the hearing, most speakers echoed the criticisms outlined in the public comments, expressing concerns that the proposed taxation could have dire consequences for U.S. crypto startups. NFT artist Tavarus Blackmon lamented:

For small teams like mine, navigating our tax burden successfully is very challenging.