Oct. 14, 2023
Dear Sir/Madam, The IRS's proposed legislation concerning the reporting of gross proceeds and basis for digital asset transactions serves as a stark illustration of excessive governmental intrusion and imposes an unnecessary weight on taxpayers. While ensuring tax compliance and preventing evasion are paramount, the IRS should factor in the distinctive characteristics of cryptocurrencies and digital assets before enforcing rigorous reporting mandates. Here, I present my principal arguments against this proposition: 1. Ambiguity: The IRS has failed to furnish unambiguous guidelines and definitions for various aspects of digital assets, including the determination of fair market value, cost basis, and holding periods. This lack of clarity engenders bewilderment and unpredictability for taxpayers, rendering it arduous for them to accurately report their transactions. It is imperative for the IRS to institute comprehensive guidelines that account for the unique traits of digital assets. 2. Privacy Concerns: The proposed legislation necessitates brokers to disclose intricate details of digital asset transactions, including customer identities and transaction amounts. This raises grave privacy concerns, as it would create a centralized repository of sensitive financial information. The IRS should respect individuals' right to privacy and explore alternative methods that strike a balance between tax compliance and safeguarding privacy. 3. Taxpayer Burden: The reporting requisites outlined in the proposal would impose a substantial burden on taxpayers, especially those frequently engaged in trading or using digital assets for everyday transactions. The intricate calculations and record-keeping essential for compliance with the proposed legislation would require taxpayers to allocate significant time and resources to ensure precise reporting. This burden is disproportional and inequitable, given that traditional financial transactions do not demand such exhaustive reporting. The IRS should consider streamlining the reporting process and providing adequate resources and guidance to taxpayers. 4. Technological Challenges: The IRS's proposal presupposes that all taxpayers possess advanced technological tools and platforms to meticulously track and report their digital asset transactions. Nevertheless, this is not the reality for many individuals, particularly those lacking technological proficiency or facing limited access to reliable internet connections. Imposing stringent reporting requirements without acknowledging the technological challenges confronting taxpayers is unreasonable and may lead to inadvertent non-compliance. 5. International Implications: Cryptocurrencies and digital assets possess a global nature, and numerous taxpayers partake in cross-border transactions. The proposed legislation inadequately addresses the intricacies of international transactions, encompassing matters related to jurisdiction, tax treaties, and foreign reporting requirements. This oversight in terms of international implications could result in double taxation or conflicting reporting obligations for taxpayers. The IRS should collaborate with international tax authorities to fashion a synchronized approach to digital asset taxation. 6. Inhibition of Innovation: Cryptocurrencies and digital assets harbor the potential to stimulate innovation and economic growth. However, the IRS's proposed legislation might quash this innovation by creating unwarranted barriers and hardships for individuals and businesses operating in the digital asset sphere. It is imperative for the IRS to cultivate an environment that encourages innovation while still ensuring tax compliance. 7. Disproportionate Penalties: The penalties delineated in the proposed legislation for non-compliance with the reporting requirements are disproportionately severe. This could deter individuals from participating in the digital asset market or result in unintentional errors owing to the fear of harsh penalties. The IRS should contemplate the implementation of penalties that correspond to the offense and exhibit leniency towards taxpayers who genuinely strive to comply. 8. Regulatory Disarray: The proposed legislation exacerbates the already fragmented regulatory landscape surrounding cryptocurrencies and digital assets. Various regulatory agencies offer disparate interpretations and approaches to digital asset taxation, creating perplexity and inconsistency for taxpayers. It is imperative for the IRS to engage in collaborative efforts with other regulatory bodies to institute a comprehensive and cohesive framework for digital asset taxation. 9. Unintended Consequences: The proposed legislation may engender inadvertent repercussions, such as driving digital asset transactions underground or pushing them to offshore platforms beyond the IRS's jurisdiction. This could lead to a diminishment in tax revenue and impede the IRS's capacity to effectively oversee and monitor digital asset transactions. It is pivotal for the IRS to deliberate on the potential unintended consequences of its actions and endeavor to strike a harmonious balance that promotes compliance without stifling innovation or driving transactions into unregulated spaces. In summation, while ensuring tax compliance in the realm of cryptocurrencies and digital assets is imperative, the IRS's proposed legislation epitomizes an overreach that overlooks the unique characteristics and challenges intrinsic to these assets. The absence of clarity, privacy concerns, taxpayer burden, technological challenges, international implications, stifling of innovation, disproportionate penalties, regulatory fragmentation, and unintended consequences all underscore the necessity for a more nuanced and equitable approach. The IRS should embark on further dialogues with stakeholders, including taxpayers, industry experts, and international counterparts, to develop a comprehensive framework that fosters compliance while nurturing innovation and safeguarding individual rights. Further more: The proposed regulations, particularly when it comes to the reporting of digital asset transactions, could inadvertently lead to a situation where every Uniswap user, and users of similar decentralized exchanges, would essentially be treated as if they were running a traditional exchange. Here's how this could happen: Automated Market Makers (AMMs) Like Uniswap: Uniswap and similar platforms operate on the principle of automated market makers, allowing users to create liquidity pools and trade assets without the need for a centralized intermediary. Users simply connect their wallets to the platform and can start trading. Under these proposed regulations, every trade made on such platforms may be subject to the same reporting requirements as a traditional exchange. Complex Reporting Requirements: Traditional exchanges are equipped to handle and report on complex transactions and fulfill regulatory requirements. However, many Uniswap users are individual retail investors, and these regulations might force them to navigate complex reporting requirements, track every transaction, determine cost basis, and compute capital gains for every trade. Privacy Concerns: The proposed regulations often require reporting not just of the transaction but also user identities. This imposes significant privacy concerns. Users of Uniswap typically value the privacy and anonymity these decentralized platforms offer. Forcing them to disclose their identities for every transaction fundamentally changes the nature of these platforms. Technical Challenges: Many Uniswap users may not have the technical knowledge or tools required to comply with these regulations. Traditional exchanges have built-in mechanisms for tracking and reporting transactions, while Uniswap users often rely on external tools. These users would face considerable challenges in meeting the reporting standards expected of them. Overwhelming Burden: For frequent traders and liquidity providers, the burden of tracking and reporting every transaction could become overwhelming. This could potentially deter many users from participating in decentralized exchanges or force them to move to platforms that do not fall under the same regulatory scrutiny. Innovation Stifling: Decentralized exchanges like Uniswap are at the forefront of financial innovation. Imposing regulations designed for centralized exchanges on these platforms could stifle this innovation. It might make it harder for developers and entrepreneurs to create and operate decentralized financial products and services. In essence, while regulatory oversight is essential for protecting investors and ensuring market integrity, treating every Uniswap user as an exchange could have far-reaching consequences. It might result in a loss of privacy, create significant barriers for users, and potentially stifle the innovation and accessibility that decentralized exchanges bring to the world of finance. A more balanced approach that considers the unique nature of these platforms is crucial to strike a fair balance between regulation and innovation. Kind Regards, Robin Assen Amsterdam The Netherlands