Criticisms of the New Crypto Broker Reporting Regs Are Entirely Justified
I have a lot of respect for Tony, but I strongly disagree with this post of his, which dismisses criticisms of Treasury Decision 10021.
Anthony Tuths on LinkedIn: Understanding The New IRS DeFi Broker Tax Regulations
Social media is awash with outrage and criticism of the new U.S. tax "broker" reporting regulations for digital assets directed at DeFi. This, despite the...
Treasury's new regs treat as brokers any website that provides users with info they can submit to blockchain validators to effect a transfer of their self-custodied crypto. That would include ChatGPT and Google, even though they are not brokers under any reasonable reading of the statute. The regs, therefore, are arbitrary and capricious.
LEGAL BACKGROUND. Brokers who effect sales for customers generally must provide customers and the IRS with information about the sales on Form 1099. The Infrastructure Investment and Jobs Act amended tax code section 6045 to include, in the definition of broker, "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."
The legislative history to the amendment cautions Treasury against a broad reading. In response, Treasury published an open letter in 2022 assuring Congress that any regs “will be based on principles broadly similar to those applicable under current law for broker reporting on securities transactions."
Nevertheless, TD 10021 treats websites as brokers if they (1) enable people to input transaction order details and (2) translate those details into a call function. See regs section 1.6045-1(a)(21)(iii)(A)(1).
FACTUAL BACKGROUND. Unlike traditional brokers, websites neither custody assets nor communicate transaction orders to custodians. Instead, a website can only receive an input from a user and output information to the user. The information output might include a call function (i.e., JavaScript) that the user can send to blockchain validators to effectuate a peer-to-peer exchange of their self-custodied crypto.
To improve user experience, some websites include a "connect wallet" button that lets the website copy and paste information directly into a user's wallet instead of requiring the user to manually copy-paste. The website still cannot cause the user to actually transmit the information to blockchain validators.
ANALYSIS. Tell ChatGPT the following: "I want to exchange 1 ETH for USDC using the Uniswap software protocol. Provide me with the transaction message I need to sign from my crypto wallet to effect the trade." ChatGPT will output a usable call function. You can do the same with Google, though it might take a few queries.
No reasonable reading of section 6045 allows Treasury to treat info providers like ChatGPT and Google as brokers just because they provide information that lets users effect peer-to-peer trades.
Some people read the new regs to apply only to websites with connect wallet buttons. But there is no indication Congress intended the dividing line between broker and nonbroker to be the presence or absence of a widget that facilitates copy-pasting of info, nor is there a policy justification for that dividing line.
In short, TD 10021 is arbitrary and capricious, and I am hopeful it will be withdrawn or struck down early on in the Trump administration.
