Paradigm Files Comment Letter on IRS' Unduly Burdensome Proposed Crypto Broker Rule

November 13, 2023 | Alex Grieve, Matt Johnson

Paradigm Files Comment Letter on IRS’ Unduly Burdensome Proposed Crypto Broker Rule

TL;DR: Paradigm Friday filed a comment letter responding to the IRS and Treasury Department’s unduly broad proposal to require additional reporting on digital asset transactions by wide swaths of the crypto industry. This proposal goes beyond the powers granted by Congress and will stifle innovation in the U.S.; it must be substantially changed.

Taxation lies at the heart of all government power, just as decentralization stands as the beating heart of crypto. It is critical for both the crypto ecosystem and the government that the rules of crypto taxation are properly tailored and practically administrable.

In 2021, Congress passed and President Biden signed the Infrastructure Investment and Jobs Act of 2021, also known as the Infrastructure Law. Tucked inside this law to improve America’s rails and roads was a provision that dealt with crypto, the first significant piece of legislation enacted on our young industry. That section, 80603, asked the IRS and Treasury Department to issue a rule that would apply the definition of “broker” to certain firms in crypto, tasking only those firms that actually ‘effectuate’ (or ‘cause’) onchain transactions to be completed with reporting tax information to the IRS. The IRS and Treasury issued that proposal this summer.

The proposal is much too broad, and far exceeds the task Congress gave to the two agencies, by including within its remit crypto entities that don’t “effectuate” transactions, including non-custodial digital wallet software providers, DeFi protocols, and NFT marketplaces among them, even though such entities don’t have control of key information, or even any direct user interaction.

It is the height of absurdity to task firms with reporting to the government information they do not themselves have, to say nothing of the public-private surveillance network this proposal would by definition create. We firmly believe that the IRS and Treasury Department have proposed a rule that is neither in keeping with the will of our elected officials in Congress nor is good for crypto users, the industry, or the government itself. The IRS and Treasury Department should work with the industry to pare back this proposal into something that ensures only actual brokers in crypto are reporting key tax information to the government, in line with the text and original spirit of the Infrastructure Law.

Read Paradigm’s Comment Letter here.