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Congress’s Crypto Tax Proposal Makes Perfect Sense

Congress’s Crypto Tax Proposal Makes Perfect Sense

The infrastructure plan wending its way through the U.S. Congress leaves a lot to be desired. But one of its most bitterly opposed provisions shouldn’t be controversial: a measure aimed at stamping out tax evasion in the burgeoning world of cryptocurrencies.

For most investors in most kinds of financial assets, calculating tax is relatively straightforward. Taxable gains are summarized in a 1099 form that brokers give their clients every year. The Internal Revenue Service also gets a copy so it can verify tax returns.

In the realm of crypto, 1099s are rare. The rules were written before digital assets existed, and traditional brokers often aren’t even involved. Trading occurs through a panoply of venues, including exchanges such as Coinbase and Kraken, providers of electronic “wallets” and automated protocols in the nether realm of decentralized finance. It’s hard for investors, let alone the IRS, to keep track of gains and losses.

Officials are all too aware of the problem. IRS Commissioner Charles Rettig sees lack of information on crypto as a major contributor to the gap between U.S. taxes owed and collected, which he estimates could be as large as $1 trillion a year. In recent months, both he and the Treasury Department have asked Congress to let the government require regular reporting from the relevant intermediaries.

Congress responded by adding a section to the infrastructure bill now before the House of Representatives. The legislation extends reporting requirements to digital assets, and grants the government broad authority to decide which intermediaries must report, by defining “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

This language alarms lobbyists for the crypto industry and their political allies. They say it’s too broad, covering entities incapable of complying — such as wallet developers and the computers that maintain the public ledger (known as the blockchain) where transactions are recorded. This could kill innovation, they claim, sending business offshore and turning the U.S. into a digital-asset backwater.

These concerns are overblown. For one, the legislation is just the starting point. Treasury and the IRS would have to write rules specifying who will report and how, with a period for notice and comment. Treasury says it’s interested only in entities that perform broker-like functions. Getting this right won’t be easy in such a rapidly evolving area, but that’s why a broad statute makes sense. Officials need ample leeway to adjust the requirements so they apply to entities that can provide the necessary information.

Consider decentralized exchanges, which some of the industry-proposed modifications to the legislation might exempt. They’re programmed to execute transactions automatically, and their developers can be hard to identify. They do pose a problem — but it’s far too soon to say they can’t comply, or shouldn’t be made to comply, with reporting requirements. Exempting them could leave a channel for tax evasion wide open.

Ultimately, Congress will actually need to go further — empowering Treasury to exchange information with foreign authorities, for instance, and closing other avenues for crypto-based tax evasion. But the proposed legislation is a sensible first step. It will make compliance easier for law-abiding taxpayers, and make life more difficult for the rest.

Editorials are written by the Bloomberg Opinion editorial board.

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