Crypto lobbying group Blockchain Association urged the Internal Revenue Service (IRS) on Monday, November 13, to relent from the risk of damaging the US decentralized finance (DeFi).
Blockchain Association argued that redefining a single word within the federal tax regulation proposed by the US Treasury and IRS would permanently destroy the existing DeFi projects. Also, the amendments would push the DeFi projects to exit the US.
Blockchain Association issued a 33-page commentary regarding the proposed change. The crypto lobby group outlined a detailed case illustrating to the IRS reasons why an apparent bureaucratic change to broker definition would plunge the US DeFi industry into chaos. The crypto lobbying group expressed displeasure with the tax collector’s proposal submitted in late August.
Blockchain Association Opposed to Blanket Rules Targeting Decentralized Finance
Blockchain Association indicated that the proposed changes would broaden the broker’s scope to apply to all centralized crypto exchanges with operations in the US. Also, the broker definition would apply to crypto projects, whether directly or indirectly, facilitating digital assets transfer that belong to other individuals.
The Blockchain Association indicates that the changes would impose a blanket rule to the DeFi protocol, subjecting US centralized exchanges and DeFi projects to similar reporting rules applied to stock and bond brokers.
The Blockchain Association argues that the amendment imposes an impossible standard on US decentralized finance projects. The group warned that imposing the standard would ultimately halt the US-based DeFi activities or shift abroad to territories with a receptive regulatory framework.
Blockchain Association senior counsel Marisa Coppel submitted in X (formerly Twitter) post that redefining broker word would leave a blanket rule that defeats DeFi’s vision of creating trustless financial systems.
Primarily, decentralized finance projects targeted leveraging the smart contracts to avert the project’s creator from exercising control. Also, it relies upon supportive automation to prevent the project’s creator from accessing the users’ finances and information.
Blockchain Association disclosed that the proposal by the IRS would involve attempts to link the wallet addresses with the user’s identities. Doing so results in serious and irreparable privacy concerns for the affected users.
The lobbying group compared the proposal to the unfortunate incident where one’s credit card transactions are disclosed online. It would imply exposing the individual’s transaction history to the entire world.
The digital asset lobbying group indicated that it would not involve much imagination to comprehend that such would yield unacceptable outcomes.
Proposed IRS Rule Attracts Over 120000 Public Comments
Notably, the proposed amendments to the IRS rule have attracted over 120,000 comments from the public in its 74-day open period. The period’s conclusion will allow the IRS to hold a public hearing to decide on the proposed rule’s adoption.
Coppel addressed the hearing and admitted the IRS regulators’ attentive engagement and thoughtful questions about the issues raised concerning the decentralized technology. Also, the IRS regulators expressed concerns involving nonfungible tokens (NFTs) and stablecoins.
Coppel expressed cautious optimism about the proceedings.
William Entriken, who admitted involvement in formulating the ERC-721 standard that facilitated a pathway for NFTs on Ethereum, indicated that it was unviable for the IRS to gather all personalized transaction data. He argued against the IRS gathering details regarding guns and abortion expenditure. He submitted that the IRS proposal demands the disclosure of individual transactions, leaving its compliance in conflict with other provisions.
Exclude Stablecoins to Avert Overburdening IRS with Low-Value Reporting
Entriken decried the proposal by the IRS to demand disclosure of transactions involving assets that neither result in losses nor gains. The crypto community opposed the inclusion of stablecoin-based transactions as taxable exchanges of digital exchanges.
The community submitted that stablecoins have value pegged to a steady asset, often the dollar. The primary use of stablecoins is restricted to the common currency within the digital assets sector.
Coinbase tax vice president Lawrence Zlatkin informed the government representatives in the Monday hearing that tax reporting involving no gains and losses results in extensive disclosures he labeled low-value reporting.
Zlatkin argued against policing every digital asset transaction, warning that doing so would potentially flood the overburdened tax agency. Consequently, honoring the IRS proposal could translate into billions of additional tax filings annually.
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