Fight for the Future Comment on Re: Treasury and IRS NPRM on Digital Asset Reporting
This is the comment that Fight for the Future submitted to the Department of the Treasury and the Internal Revenue Service (IRS) on November 13, 2023 in response to its Notice of Proposed Rulemaking (NPRM) on Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions (Docket IRS-2023-0041)
The Honorable Janet Yellen, Secretary of the Treasury,
The Honorable Wally Adeyemo, Deputy Secretary of the Treasury,
The Department of the Treasury,
1500 Pennsylvania Avenue, NW
Washington, DC 20220
The Honorable Daniel Werfel, Commissioner of Internal Revenue
The Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Dear Executives of the Treasury and IRS,
We are writing to submit a comment to the Notice of Proposed Rulemaking regarding the Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions regulations.
Fight for the Future is a digital rights nonprofit that has been active in the decentralized tech space, building on over a decade of advocacy and activism for open source software, privacy, and the democratization of the internet. In 2021, we fought the passage of the Infrastructure Investment and Jobs Act (IIJA) as the package contained some misguided provisions that while aiming to address issues around cryptocurrency, also undermines human rights and free expression, creates harmful surveillance and reporting requirements, and threatens software developers who are trying to create alternatives to Big Tech. As the Treasury Department and IRS move forward on making regulations to bring the IIJA into effect, similar issues arise in the proposed regulations.
We understand the need for regulation around digital assets and the efforts of this rulemaking to close the tax gap, address tax evasion risks posed by digital assets, ensure that everyone plays by the same set of rules, and help taxpayers know how much is owed on the sale or exchange of digital assets. However, we have significant concerns which we detail further in our comment. In particular, these proposed rules, if not revised, will be unconstitutional and a massive blow to human rights, expanding the surveillance state while also attacking the right to privacy. The proposed rules in their current form will deter the development of the digital asset ecosystem without helping taxpayers understand and meet their tax responsibilities as anticipated. Tax evasion is yet an unsolved problem in traditional finance and should not be used as a justification for government overreach and the violation of human rights in a misguided effort to solve this problem where digital assets are concerned.
Key Issues and Concerns
- Broad Language and Government Overreach: First and foremost, by seeking to make anyone “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” a broker, these new rules cast a wide net. They rope in a wide range of participants in the digital assets and decentralized technology projects industry that extend beyond current definitions or understandings of brokers. Yet, they may be required to amass vast amounts of user data and other personally identifiable information in order to report to the IRS. Imposing these requirements on persons who would otherwise not be understood as brokers—who are exchanging digital assets directly with each other on a peer-to-peer basis, participating in the development or maintenance of software, decentralized tools and websites or any other explorations of this technology is unreasonable.
- Constitutionality and Human Rights Implications: These rules as currently written would be unconstitutional and a violation of human rights, particularly the First and Fourth Amendment. Simply put, communication using programming languages (“writing code”) is a freedom protected by the First Amendment. Additionally, the Fourth Amendment makes it unconstitutional for the government to force an individual or business that is not a state actor to collect and report the personal information of another person if they do not already collect that information as part of their business, have no reason to collect that information apart from the government demand, and if the target of that information collection does not already voluntarily provide that information to them. These new rules would infringe on these protections by requiring these types of decentralized technology projects and the individuals developing them to rewrite their code, strip the in-built privacy protections for their users in order to collect information not required for the running of their platform in a manner that goes against their beliefs in (financial) privacy based on this government demand. Unlike traditional financial instruments, digital assets operate on decentralized networks. Many digital assets and decentralized technologies such as self-hosted or un-hosted wallets are designed to provide transparency, privacy and security to their users by not requiring information to be handed over to intermediaries for every exchange. However, the new rules will require the removal of these privacy features. It would also impact individuals who merely develop software, websites, or other tools as they would be forced to change the way their platforms function in order to collect and report extensive user information. This takes away users’ reasonable expectation of privacy, and forces software developers to assist the government in building surveillance into technologies where that would otherwise not have been the case.
- The Burden of Impossible Compliance: Due to the nature of decentralized technologies and digital assets, many providers do not have access to the information the IRS is requiring them to provide. Individuals running or maintaining websites, participating in peer-to-peer exchanges may be required to meet legal obligations similar to brokers and exchanges, asked to provide information they have no reasonable means of obtaining, keeping or reporting. This proposal imposes an undue burden on such individuals and entities. It will have the chilling effect of either forcing centralization and surveillance, creating more intermediaries or in very many cases, causing them to cease functioning due to an inability to meet the requirements. Imposing reporting requirements that are not feasible to implement also effectively undermines the purpose of the proposed new rules as well as the fundamental principles of decentralized technologies.
- Resultant Responsibilities and Strain on Government Resources: It is important for the Treasury and the IRS’ to weigh their ability to meet the data privacy and security requirements that would arise from this information collection as well as the burden this places on the government’s resources. In 2022, the IRS mistakenly made private information about 120,000 taxpayers publicly available and the Treasury has been hacked in the recent past by foreign actors. Given this possibility, the government itself poses an additional risk to taxpayers by requiring and collecting this unnecessary information that serves no other purpose. The increased information collection puts peoples’ personal, financial, and other data at further risk of cyberattacks that the agency cannot assure protection from. Forcing software developers to collect user information without proper safeguards would create opportunities for malicious actors to access, exploit and misuse this data. Strong security measures are needed by both the government and the digital assets platforms to prevent unauthorized access and protect users from potential harm. The Treasury and IRS will need to consider the necessary data privacy and security measures needed to ensure the safety of taxpayer’s information post-collection, assess the burden this places on the government’s resources and weigh those against the purported benefits of addressing tax evasion which might not be fulfilled. They also need to weigh the benefits of making tax collection easier against the burden of reporting, the impact on human rights and technology development and the inevitable mass surveillance that arises from meeting the information collection and reporting requirements if at all possible.
Conclusion and Recommendation
We welcome thoughtful, balanced, well informed regulations on digital assets and decentralized technologies. However, these proposed rules are broad, unconstitutional and a violation of users’ right to privacy. They assume that anyone seeking financial privacy and anonymity is a tax cheat or criminal. Meanwhile, privacy-protecting tools are increasingly important for many marginalized communities and people under attack. The imposition of new reporting requirements on individuals or entities who would not otherwise be classified as brokers, and typically would not have access to, collect or report personal information of their users undermines privacy, particularly financial privacy at a time when it is most needed. Tax compliance is important but not more important than the privacy and security of taxpayers and their data. The IRS and Treasury should take a cautious approach and interpret the statute narrowly. Rather than cast a wide net on who qualifies as a broker, the definitions should be specific and mirror traditional broker definitions and requirements with only slight modifications to suit the nature of decentralized technologies and the digital asset ecosystem. To avoid violating the First and Fourth Amendment rights, reporting requirements should be limited to information they already collect rather than requiring developers to rewrite code that goes against their beliefs and aids government surveillance. Revise this policy by taking out the requirement for developers to stalk and surveil users of their technologies.
Signed,
Fight for the Future
c/o Eseohe Ojo