IRS proposal to track your wallets will put a damper on the crypto industry

The United States Internal Revenue Service (IRS) is considering a proposal that would have sweeping consequences for the cryptocurrency industry. Investors should be concerned, because it could significantly impact the way that individuals — both inside and outside America — are allowed to engage with digital assets.

The IRS is proposing an initiative under Section 6045 of the tax code to establish new tax rules for the treatment of cryptocurrency providers. Specifically, the agency is seeking to amend the law to expand the definition of “brokers” to include nearly all crypto-service providers — including, for instance, decentralized exchanges (DEXs) and wallet providers. Those providers would be required to collect personal information from users beginning in 2025, and to begin sending (a still-unreleased) Form 1099-DA to the IRS in 2026. It would be a crypto-focused version of the 1099-MISC.

The IRS’s move to redefine “broker” is not just a regulatory tweak but a fundamental shift that could reshape the entire U.S. cryptocurrency landscape. By potentially including a wide array of cryptocurrency service providers under this definition, the IRS is extending its reach significantly. This expansion means that many more entities involved in digital asset transactions, from wallet providers to small-scale developers, could be required to report user information and transaction details to the government.

For users and investors in the cryptocurrency space, this change could translate into increased reporting and compliance obligations — rolling back the anonymity and flexibility they currently offer users. For service providers, it would require the adoption of new systems and procedures for compliance, requiring them to ask users for their personal information. While the IRS is technically attempting to target American users, service providers would have no way to determine nationalities before harvesting user data.

Related: IRS proposes unprecedented data-collection on crypto users

The move would be a decisive step toward bringing the world of digital assets in line with traditional financial systems in terms of regulatory oversight and transparency. It’s crucial that the average American understand the proposal’s implications, because it represents a significant pivot point in how digital assets are perceived and managed by regulators.

The industry’s response

The industry’s response to these regulatory changes has been marked by concern and proactive engagement. Major players have expressed apprehensions about the intrusion into personal privacy, including Coinbase, whose chief legal counsel Paul Grewal, noted the change would “set a dangerous precedent for surveillance of the everyday financial activities of consumers by requiring nearly every digital asset transaction — even the purchase of a cup of coffee — to be reported.”

At their core, the proposed regs go well beyond the congressional mandate to establish tax reporting rules on par with those for traditional finance, putting digital assets at a disadvantage and threatening to harm a nascent industry when it’s just getting started. 2/4

— paulgrewal.eth (@iampaulgrewal) October 18, 2023

The broader industry is similarly concerned about the possibility of regulations stifling the growth of digital assets. A primary issue is the appropriate application of conventional regulatory frameworks to decentralized systems, ensuring investor privacy protection and fostering an environment that supports innovation while maintaining market stability.

The change would have profound implications for individual investors and developers within the cryptocurrency realm. For investors, clearer regulatory guidelines could bolster market confidence, potentially leading to increased investment activity. However, excessively strict regulations risk curbing innovation and reducing the appeal of cryptocurrencies as an alternative to traditional financial systems. For developers, especially those in the DeFi sector, these regulatory shifts present both compliance challenges and opportunities to influence the development of rules that recognize the unique capabilities of blockchain technology.

Related: Expect new IRS crypto surveillance to come with a surge in confiscation

Navigating the complexities of these regulatory proposals necessitates a balanced approach. The cryptocurrency industry must proactively engage with regulators to ensure the creation of fair, practical, and innovation-friendly regulations. Balancing regulatory oversight with the preservation of the ecosystem’s core values is crucial for the future of digital finance. The industry’s capacity to adapt to these regulatory changes while retaining its innovative essence is pivotal.

The requirement for regulatory adaptability and industry evolution is more apparent than ever. The cryptocurrency sector is encouraged to evolve its practices to meet emerging regulatory standards while preserving its innovative and decentralized nature. Simultaneously, regulators are challenged to comprehend the unique aspects of digital assets and decentralized systems to devise effective, sensible, and forward-thinking regulations.

Lobbying and political contributions

The cryptocurrency industry’s involvement in lobbying and political contributions has become increasingly significant. In 2022, the industry’s lobbying efforts and political contributions skyrocketed, reflecting its growing interest in shaping regulatory frameworks. This political engagement is a clear indicator of the industry’s commitment to influencing policy decisions that will affect its future. It also highlights the need for a regulatory environment that understands and accommodates the unique characteristics of digital assets and blockchain technology.

Expanding the definition of “broker” would stifle innovation for the industry, but particularly on American soil. The cryptocurrency community’s resilient response, advocating for fair and supportive regulatory measures, underscores the delicate balance between effective regulation and fostering technological progress.

As the industry actively participates in shaping these regulations, its involvement is crucial to ensuring the U.S. cryptocurrency sector continues to thrive in a competitive global landscape, balancing regulatory compliance with innovation and growth.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.