IRS proposed regulation for crypto – William Entriken Blog

The United States Internal Revenue Service (IRS) has proposed regulations for how taxes and transaction reporting will apply to crypto and other digital assets.

This affects a lot of people (they estimate about 10 million). And they are accepting comments. Below are the comments I submitted. There’s a lot here. and I will posting about 30 nuggets from here onto YouTube Shorts over the next week.

Dear Secretary Yellen and Commissioner Werfel,

Thank you for this opportunity to provide comments on the notice of proposed rulemaking for digital asset transactions.

I am the lead author of the document ERC-721, which started non-fungible tokens as cited in this proposed regulation. I am a contributor to Blockchain Networks: Token Design and Management Overview published by the U.S. National Institute of Standards and Technology as acknowledged inside. I have experience creating many kinds of digital assets discussed here and I advise client(s) that are or may be a digital asset broker as defined in the proposed regulation. I co-host a weekly video call Community Service Hour to discuss these topics, available wherever you get podcasts. All comments here are my own.

Below are my responses to each question opened by the Treasury Department and the IRS in the notice of proposed rulemaking (NPRM), Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions.

Executive summary

The proposed regulation broadly expands reporting of consumer activity which exceeds IRS authority and probably violates several parts of the U.S. Constitution.
Credit card/airline points meet the definition of digital assets in the relevant code and this proposed regulation. They also have a larger tax gap than Bitcoin and pictures of animals. However, the NPRM focuses entirely on Bitcoin and pictures of animals, instead of credit card/airline points.
Several material omissions, understatements or other problems in the NPRM may require starting over under rules in the Administrative Procedures Act.

Comments on explanation of provisions

Comments specially requested throughout the discussion in the Explanation of Provisions…

Does the proposed definition of digital asset accurately and appropriately define the type of assets to which these regulations should apply? See Part I.A.1 of this Explanation of Provisions.
1. No. The proposed definition is not appropriate because it exceeds the scope claimed in the NPRM preamble. Specifically, the NPRM preamble excludes from digital assets “those that exist only in a closed system (such as a video game).” However in the actual proposed regulation text, no such limitation is stipulated. People reading the NPRM preamble will be misled as to the effective scope of the regulation.
2. No. The proposed regulation’s definition is also not accurate because its examples and estimates all exclude the largest category of digital assets. Credit card and loyalty points programs are digital representations of value, with variable exchange rates, on ledgers distributed across multiple partners that are cryptographically secured. The tax gap for this asset class is 100% and the transaction volume and underreported income exceeds blockchain and all other examples put forth in the proposed regulation examples sections. Whereas NPRM cites merely 14.5 million taxpayers as affected, this number is severely underestimated because this dominant category of digital assets is not being considered.
  
  Here is a brief illustration of how this class of digital assets works. I can use a Chase credit card to earn Ultimate Reward digital asset points which are transferable at some rate to British Airways digital asset miles and then to Iberia digital asset miles, and later redeemed for a flight. Or those same digital assets can be moved in different directions to redeem for cash/donations/physical products at varying rates of exchange. They can be transferred to others, traded and donated. This market also experiences extreme price movements which are tracked by various independent publications and usually have cash-value estimates. The issuers of these points also routinely make offers to redeem their own digital assets in exchange for products and services. The points balances are maintained on distributed ledgers through affiliate programs, all of which are cryptographically secured.
  
  Another example in this class is Points.com, a digital asset broker and digital asset where their website details how it meets the Infrastructure Investment and Jobs Act (2021) definition: “In just under four months, Points launched Hilton and Lyft’s premier travel and hospitality partnership, which enabled Hilton Honors members to earn Points by riding Lyft. The result: members who earned Hilton Honors Points on their Lyft rides were more engaged in the following months.” https://www.points.com/products/everyday-earn-and-burn/
3. While the proposed regulation applies (and should do so more clearly) to thousands of games on Apple’s App Store, and to the largest banks and travel industry companies, the NPRM background section is basically telling Apple, those games’ developers and other companies they don’t need to worry about it. This omission may be material in terms of the Administrative Procedures Act.
Does the definition of digital asset or the reporting requirements with respect to digital assets inadvertently capture transactions involving non-digital asset securities that may use distributed ledger technology, shared ledger, or similar technology to process orders without effecting sales? Should any definitions or reporting rules be modified to address other transactions involving tokenized or digitized financial instruments that are used to facilitate back-office processing of the transaction? See Part I.A.2. of this Explanation of Provisions.
1. No such inadvertent capture occurs. No exceptions are necessary.
If an exception is necessary for transactions involving non-digital asset securities that may use distributed ledger technology or similar technology to process orders without effecting sales, how should it be drafted so that it does not sweep in other transactions (such as tokenized securities, or other digital assets that are securities) that should not be exempted from the reporting requirements? For example, should, and if so how should, reporting requirements distinguish between, and thus avoid double-counting of, sales of digital assets from use of distributed ledger technology or similar technology for mere recordkeeping, clearing, or settlement of tokenized securities or other assets? See Part I.A.2. of this Explanation of Provisions.
1. No exception is necessary. Such mere usage of distributed ledgers to effectuate trades of securities would cause brokers to need to report the transactions as securities and also (inadvertently) as digital assets.
  
  In these scenarios, the brokers would already be collecting the required information. Sending the same information (which was already collected) twice is not a burden worth avoiding.
How common are digital asset options that are also section 1256 contracts? Are there less burdensome alternatives for reporting these digital asset option transactions? For example, would it be less burdensome to allow brokers to report transactions involving section 1256 contracts that are also digital assets or the delivery of non-digital assets that underlie a digital asset option as a sale under proposed § 1.6045–1(a)(9)(ii)? See Part I.A.3 of this Explanation of Provisions.
1. The blockchain perpetuals futures contracts “perps” may possibly be classified under section 1256 (whether actually reported or not). On a cursory glance of these markets, value from US taxpayers appears to be under one billion USD.
Is there is anything factually unique in the way short sales of digital assets, options on digital assets, and other financial product transactions involving digital assets are undertaken compared to similar transactions involving non-digital assets, and do these transactions raise any additional reporting issues that have not been addressed in these proposed regulations? See Part I.A.3 of this Explanation of Provisions.
1. Yes. Some brokers are transacting “short sales” on “non-fungible tokens”. In normal circumstances (positive time-value of money, sane actors) it is not possible to short sale a distinguishable asset. And therefore such “short sales” can actually be paid back by another substitute “non-fungible token”. Under the proposed regulation, such transactions may underreport information necessary for the IRS to validate gains/losses.
2. Yes. Digital assets are sometimes possible to transact using a self-executing contract (“smart contract”). The failure conditions are different for this technology. They are more likely to fail without recourse to the taxpayer and and more likely to fail in a way that transactions are happening unbeknown to the taxpayer. This is acutely true for short sales because they can be liquidated. However, as regarding penalties under 6045(a), the existing provisions “due to reasonable cause and… not due to willful neglect” appear sufficient to address this concern.
Are there alternative information reporting approaches that could be used by digital asset trading platforms that collect and retain no information or collect and retain limited information about the identity of their customers that would satisfy tax compliance objectives while reducing privacy concerns? See Part I.B of this Explanation of Provisions.
1. Yes. Digital assets trading platforms should be allowed to rely on third-party service partners to collect identity information and report that to the IRS. Thus, each required disclosure to the IRS could be made in two parts, one for the gross proceeds and one for the identity, each cross-referenced to each other (using a globally unique identifier). Any proposed regulation should clearly limit liability of such cooperating trading platforms if they are operating in good faith but still fail to make correct required disclosures on account of their third party partner’s actions.
2. Later, with congressional funding, IRS itself should be such a service for identifying taxpayers and providing blinded identifiers to parties that need to report transactions. And such a system should not rely on facial biometrics, or be operated by the private sector, as was the case with disgraced login system IRS previously used.
Are there any technological or other technical issues that might affect the ability of a non-custodial digital asset trading platform that is a person who qualifies as a broker to obtain and transmit the information required under these proposed regulations, and how might these issues be overcome? See Part I.B of this Explanation of Provisions.
1. Note: The term digital asset trading platform is referenced to the NPRM preamble and is non-normative. And the definition of broker is fatally flawed whereas it assumes that automatically executing contracts are capable of living, breathing or asking customers for their social security number. Responses below on this question assume an appropriate definition of broker is substituted.
2. There are no issues. A separate comment was submitted by Consensys Software Inc. to the contrary (at “the implementation period should be extended”) which I refute. Consensys claims a “tremendous challenge” to modify its software and business processes to implement this compliance program. Consensys’s only product which is applicable here is MetaMask, an unlicensed broker that allows to purchase digital assets and trade digital assets. These purchase/trade features were recently added. The software configuration and project management system for MetaMask is public on GitHub, there is an option to revert that feature. Clicking a button is not a tremendous challenge. Collecting and transmitting customer names, addresses and social security numbers is not a technological or technical challenge. Instead their challenge is that the proposed regulation makes their business model less attractive to customers. Business model challenges do not warrant changing the implementation period nor the requirements for obtaining and transmitting.
3. If there are any actual issues, they can be mitigated by the digital asset trading platform redeploying their product on top of immutable hosting (such as IPFS or DMC) and relying on exempt transaction validators (i.e. on-chain commerce) for information exchange. In other words, the digital asset trading platform ceases to be a broker under the proposed regulation, and the effect of the regulation on them fizzles.
In light of the fact that digital asset trading platforms operate with varying degrees of centralization and effective control by founders or others, does the application of reporting rules only to “persons” (as described in Part I.B of this Explanation of Provisions ) adequately limit the scope of reporting obligations to platforms that have one or more individuals or entities that can update, amend, or otherwise cause the platform to carry out the diligence and reporting rules of these proposed regulations? See Part I.B of this Explanation of Provisions.
1. No, it does not adequately limit because some people who are acting as market participants (market makers, traders) may be misclassified as trading platforms.
2. No, it does not adequately limit because in proposed § 1.6045-1(b)(14)(iii) Example 17: Effect, and digital asset middleman, Analysis with respect to Z, the proposed regulation misunderstands how automatically executing contracts work. Many unnecessary facts in this example are relied on to arrive at the conclusion that Z is not a digital asset middleman. To clarify: it is not relevant that Z originally developed the software. It is not relevant that Z open-sourced the software. It is not relevant that Z is unrelated to P2X. It is not relevant that Z does not maintain the software. It is not relevant that Z does not receive a fee when the software is used. It is not relevant that Z does not have the power to set or change the terms under which its software can be used. It is not relevant that Z is a person or whether they are alive or dead. The only thing that is relevant is that the software is an automatically executing contract. Automatically executing contracts are not able to query customers for their name, address, and social security number. Therefore, without any further consideration it is evident to say that Z is not a digital asset middleman. By providing unnecessary qualifiers on the example a person is shown as not being a digital asset middleman, the proposed regulation does not adequately limit the scope of reporting obligations.
Should the provision of connection software by a wallet provider to a trading platform (that customers of the trading platform can then use to access their wallets from the trading platform) be considered a facilitative service resulting in the wallet provider being treated as a broker? See Part I.B of this Explanation of Provisions.
1. Yes, sometimes. The MetaMask software (the popular wallet provider for Ethereum) is a broker if it includes a “trade” or “sell” button that is understood and processed by MetaMask. And it is a facilitative service if that same button hyperlinks to another person to process same using the MetaMask’s trade dress. Please note that from the customer’s perspective this difference (click to open web page from same person, click to open web page from other person) can be indistinguishable.
2. No, sometimes. However if this same MetaMask software includes an external link to “trade” or “sell” digital assets, and no actionable matching orders from other than the blockchain are provided to the customer, and the link is conspicuous such that a reasonable customer would understand the link is leaving MetaMask, then this is protected free speech under the first amendment of the US constitution, and this is not facilitating a transaction. The proposed regulation should adjust definitions in light of this.
What additional functions potentially provided by wallet software should be considered sufficient to treat the wallet provider as providing facilitative services? See Part I.B of this Explanation of Provisions.
1. A button or offer in the trade dress of the wallet software that results in a trade or sale which a reasonable customer would understand as being provided by that wallet software.
What other factors should be considered relevant to determining whether a person maintains sufficient control or influence over provided facilitative services to be considered being in a position to know either the identity of the party that makes a sale or the nature of the transaction potentially giving rise to gross proceeds from a sale? See Part I.B of this Explanation of Provisions.
1. If a person provides blinding services and then performs blinded transactions then they would not be in a position to know the nature of the transaction. A technology called zero-knowledge proofs allows wholesale sidestepping of these proposed regulations.
2. One digital identity can be shared by multiple people. If a person believes they know the identity of a customer of a public key, but then another customer purports to be its owner, it is possible that both customers are correct and this may result in inaccurate information being reported to the IRS. In this case, it cannot be said that the person knows or has reason to know the identity of the party that makes a sale.
Under what circumstances should an operator of a digital asset trading platform be considered to maintain or not to maintain sufficient control or influence over the facilitative services offered by that platform? Should, and if so how should, the ability of users of the platform, shareholders or holders of governance tokens to vote on aspects of the platform’s operation be considered? How are these decentralized organizational and governance structures similar to or different from other existing organizational or governance structures ( e.g., shareholder votes, mutual organizations)? Should this conclusion be impacted by the existence of full or even partial-access administration keys or the ability of the operator to replace the existing protocol with a new or modified protocol if that replacement does not require holding a vote of governance token holders or complying with these voting restrictions? See Part I.B of this Explanation of Provisions.
1. Let’s imagine I had previously installed a large soda dispenser in the US Capitol (i.e. anyone can pay and it vends soda). I can’t go there in-person because the Capitol doesn’t just let anybody in there. But I can control the price of the sodas and other fees in the transaction (remotely, just like other soda machines you’ve used). With this fact pattern, for some definition of “soda” and some definition of “fee” and some definition of “pay”, the proposed regulation asserts I am a “facilitator” and am in a “position to know” the “identity” of the congressmember customers. In this scenario it can not be reasonably said that I maintain sufficient control or influence over this service.
2. Aside from the fact that the ability to set fees does not directly allow one to determine somebody’s identity, the establishment of fees does not directly allow one to determine the nature of a transaction.
3. Whereas the only specified purpose of these proposed regulations “is to eliminate the overall tax gap”, and whereas IRS does not have other authority, it is no business of the IRS to consider “sufficient control” or “influence” over facilitative services. Instead, only the ability to identify customers or determine the proceeds of transactions should be considered.
To what extent should holders of governance tokens be treated as operating a digital asset trading platform business as an unincorporated group or organization? Please provide examples of fact patterns involving governance tokens and explain any differences in those fact patterns relevant to assessing the degree of control or influence exercisable by holders of those tokens. See Part I.B.1 of this Explanation of Provisions.
1. SCENARIO 1.
2. Fact pattern. SMART CONTRACT: A smart contract is permanently deployed on a distributed ledger that charges a 1% fee for all transactions and allows people to trade pictures of cats for pictures of monkeys. The smart contract is configured to defer to the holders (via majority vote) of digital assets ABC when reconfiguring the 1% fee. THE TOKENS: Mary, directly, and through shill accounts she set up to make it look like there are lots of people other than herself interested, owns 96% of the ABC assets. Mary also has the ability to “upgrade” the smart contract so that she maintains total control even if she no longer holds a majority of tokens. Mary has also lent, “staked” or otherwise encumbered her ABC assets in a way that other people could (for a time) control her votes. In addition, Mary has signed on-paper contracts with a loan shark directing how she must vote her ABC assets. THE WEBSITE: Actually using this service to trade pictures of cats and monkeys is impossible unless by using a XYZ website to match orders. The XYZ website is controlled by Bob and Bob is able to modify that website. The website is hosted on Google Cloud, served by Verizon internet.
3. Analysis. In this scenario, Bob is instrumental in operating the platform. He could, if he wanted to, collect social security numbers and other information from customers. Literally speaking, Google and Verizon also “have the ability” to do the same, even though they are not normally in the business of modifying/intercepting customer websites. Mary is not in any way instrumental to the sale. She has no direct way to know the proceeds of sales. She has no way to know the identity of customers. Nor do the people that borrowed her tokens or her loan shark. If Mary and everybody she knows spontaneously combusted, this would have no impact on how the service operates, whatsoever, for time eternal.
4. Discussion. For the purposes of the proposed regulation involving tax reporting and cost basis only Bob is relevant to the IRS. For this and any other fact patterns involving Mary, there is no scenario where Mary is relevant to any discussion. Therefore, holders of governance tokens should not be treated as operating a digital asset trading platform business as an unincorporated group or organization under any scenario merely on account of holding the governance tokens. Please understand that governance tokens are not a person, they do not have legal rights. If twenty governance tokens walk up to you and tell you to jump, you do not have to jump. Even if you did jump, they won’t even know that you did.
5. SCENARIO 2.
6. Fact pattern. PLATFORM: JPMorgan Chase Bank, N.A., is a large bank headquartered in New York City. They performed $1.5 trillion in credit card sales per year (source: JPMC annual report, 2022). Many of these sales include digital assets called “loyalty points” which are spent on Chase Travel ($8 billion) and Chase Offers ($6 billion) (ibid. p46) or distributed to a separate ledger of “partners” (ibid. p210). These loyalty points are transformed into other kinds of loyalty points with partners, all with different market valuations. Chase has last year acquired four companies specializing in loyalty points (ibid. p46). The tokens are distributed across different credit card companies, travel companies in a decentralized exchange. Chase is a public company, traded on the New York Stock Exchange with the symbol JPM which is included in the S&P 500.
7. Analysis. As a federal government employee, all of whom participate in the Federal Employees Retirement System, YOU are a partial owner of JPMorgan Chase Bank, N.A. Even if you do not personally participate in proxy voting for this company, the Department of Labor Guidance and Regulations on the Exercise of Shareholder Rights by Private-Sector Pension Plans (2023) specifies that such voting must be made in your interest. You have an interest in the ability to change the underlying protocol of this platform through your proxy voting.
8. Discussion. In all respects, YOU have more control over how Chase transacts these digital assets than Mary and all her associates in SCENARIO 1. Therefore if YOU do not treat YOURSELF as operating a digital asset trading platform business as an unincorporated group or organization on account of your ownership of Chase, then you must similarly not treat Mary as same.
Are there alternative information reporting approaches that could be used by digital asset payment processors effecting payments to merchants on behalf of customers in transactions where the payment processor is an agent of a merchant that would satisfy tax compliance objectives while reducing privacy concerns? SeePart I.B.3 of this Explanation of Provisions.
1. Yes. Digital assets payment processors (and brokers) should be allowed to rely on third-party service partners to collect identity information and report that to the IRS. Thus, each required disclosure to the IRS could be made in two parts, one for the gross proceeds and one for the identity, each cross-referenced to each other (using a globally unique identifier). Any proposed regulation should clearly limit liability of such cooperating trading platforms if they are operating in good faith but still fail to make correct required disclosures on account of their third party partner’s actions.
2. Long-term, and with additional congressional appropriations, the IRS itself should be the one to do such identity verification, with only blinded identifiers being sent to processors.
3. In addition to considering alternative information reporting approaches that satisfy tax compliance objectives, the IRS must also consider alternative information reporting approaches that do not satisfy tax compliance objectives. This is because the information reporting approaches in the proposed regulation exceed IRS’s authority. “I want to rob a bank, unless you can think of a better way to get one million dollars right now” is not a valid justification for robbing a bank.
What is the frequency with which creators or issuers of digital assets redeem digital assets? See Part I.B.4 of this Explanation of Provisions.
1. More frequently than they will ever admit to.
Should the broker reporting regulations apply to initial coin offerings, simple agreements for future tokens, and similar contracts? See Part I.B.4 of this Explanation of Provisions.
1. Broker reporting regulations should not have any special provisions for initial coin offerings or simple agreements for future tokens or similar contracts because they are not distinguishable under the law.
Are the types of consideration for which digital assets may be exchanged in a sale transaction sufficiently broad to capture current and anticipated transactions in which taxpayers regularly dispose of digital assets for consideration? See Part I.C of this Explanation of Provisions.
1. Yes.
Are there any logistical concerns about the reporting on contracts involving the delivery of digital assets created by these proposed regulations? See Part I.C of this Explanation of Provisions.
1. None of these burdens are undue whereas there is a disposition of a digital asset with reportable gains and execution of a contract that is reportable.
What is the frequency with which forward contracts involving digital assets are traded in practice? Are there any additional issues that should be considered to enable brokers to report on these transactions? See Part I.C of this Explanation of Provisions.
1. Other than for Bitcoin on regulated exchanges, on a cursory glance of these markets, value from US taxpayers for forward and perpetual digital assets contracts appears to be under one billion USD.
2. Because of the recent D.C. Circuit opinion on spot market contracts, we should expect fewer forward contracts involving digital assets in the future. See Grayscale Investments, LLC v. Securities and Exchange Commission, No. 22-1142 (D.C. Cir. Aug. 29, 2023).
Should the definition of sale or other parts of these proposed regulations be revised to address transactions not addressed in these proposed regulations, such as the transfer of digital assets to and from a liquidity pool by a liquidity pool provider, or the wrapping and unwrapping of digital assets? See Part I.C of this Explanation of Provisions.
1. No. Neither the physical placement of a negotiable security into a lockbox, nor the wrapping of a digital assets or other subjugation to encumbrances are of any concern of the IRS.
Are there other less burdensome alternatives to reporting transaction ID information and digital asset addresses with respect to digital asset sales and certain digital asset transfer-in transactions that would still ensure the IRS receives the information necessary to determine taxpayers’ gains and losses? See Part I.D of this Explanation of Provisions.
1. This question asks about things that are not the business of the IRS under existing law or the proposed regulation’s stated motivations. For example, existing regulation § 1.6045–4(h)(1)(v) is concerned with knowing the gross proceeds of a real estate transaction, and not to “ensure the IRS receives the information necessary to determine taxpayers’ gains and losses.” However the proposed regulation adds § 1.6045–4(h)(1)(vii) which brings the additional concern of verifying individual transactions and cost basis, itself bringing in and ignoring the additional privacy concerns it brings. It is out of scope of the proposed regulation and the authority of the IRS to include this, and possibly other, required disclosure. “Less burdensome” is not the correct threshold for determining the applicability of regulation in these circumstances.
Should an annual digital asset sale threshold, above which the broker would report transaction ID information and digital asset addresses, be used? If so, what should that threshold be? See Part I.D of this Explanation of Provisions.
1. No. Such a dollar-level threshold does not apply for securities sales and therefore digital asset sales should not be treated differently.
Should the time reported using UTC time be reported using a 12-hour clock (designating a.m. or p.m. as appropriate) or a 24-hour clock? To what extent should all brokers be required to use the same 12-hour or 24-hour clock for these purposes? See Part I.D of this Explanation of Provisions.
1. The time should be reported using ISO 8601 format in UTC timezone either to the second or, if available, to the millisecond resolution. Specifically, that would be like “2023-10-31T20:08:49Z” or “2023-10-07T20:08:49.123Z” respectively.
2. This is an ISO standard, it is well-established, and it is applicable in this circumstance. All information reporters are able to supply in this format.
Is a uniform time standard overly burdensome, and are there circumstances under which more flexibility should be provided? See Part I.D of this Explanation of Provisions.
1. No. The uniform time standard is not burdensome and it is the current format that most information reporters are already using.
Are there alternatives to basing the transaction date on the UTC for customers who are present in different time zones known to the broker at the time of the transaction? See Part I.D of this Explanation of Provisions.
1. There are alternatives possible but they are not reasonable.
Should the fair market value of services giving rise to digital asset transaction costs (including the services of any broker or validator involved in executing or validating the transfer) be determined by looking to the fair market value of the digital assets used to pay for the transaction costs? Are there circumstances under which an alternative valuation rule would be more appropriate? See Part I.E.2 of this Explanation of Provisions.
1. This question rests on the improper assumption that transaction costs should be or can be calculated at a market value. Any proposed regulation that rests on valuation of transaction costs must include a provision for optional at-cost valuation if warranted. If a transaction cost is paid ahead of time and held in inventory and then later used, the price paid should be (at the option of the one doing this transaction) recognized as the actual amount the person originally paid for those transaction cost tokens.
2. Today I put gas into my car. This gas is both a marketable security and the fuel for driving my car. When I put it into my car, my intention was that I would use that fuel later to drive my car. Under the proposed regulation, for various definitions of “car”, “gas” and “drive”, it will be necessary for me to report and recognize gains at each moment while driving at the market price of gas minus the price when I filled up. Such reporting is inappropriate under the minimal fact pattern where: assets (including digital assets) are acquired in an inventory, the inventory were acquired as consumables to be spent on a service, and the inventory where later spent on that service.
Are there any suggestions that could work to avoid duplicative multiple broker reporting for sale transactions involving digital asset brokers without sacrificing the certainty that at least one of the multiple brokers will report? See Part I.H of this Explanation of Provisions.
1. No comment.
Is there an alternative approach that could be objectively applied to differentiate between a U.S. digital asset broker’s U.S. business and non-U.S. business for purposes of allowing different documentation to be used for the broker’s non-U.S. business, and how could this alternative approach avoid being readily subject to manipulation? See Part I.I.1 of this Explanation of Provisions.
1. No alternate approach is necessary. Digital asset brokers will set up separate entities as necessary for manipulation.
Are the U.S. indicia listed in proposed § 1.6045-1(g)(4)(iv)(B)( 1 ) through ( 5 ) appropriate and sufficient? See Part I.I.3 of this Explanation of Provisions.
1. Yes.
Should the regulations define when a broker has reason to know that a digital asset broker is organized within the United States, and are there suggestions for objective indicators that a digital asset broker is organized in the United States? See Part I.I.3 of this Explanation of Provisions.
1. Only if the IRS shall publish and maintain a list of such qualified brokers on its website.
Are there administrable rules that would allow CFC and non-U.S. digital asset brokers conducting activities as MSBs to apply different rules to their U.S. and non-U.S. business activities while still ensuring that they are reporting on transactions of their U.S. customers? See Part I.I.4 of this Explanation of Provisions.
1. No alternate approach is necessary. CFC and non-U.S. digital asset brokers conducting activities as MSBs will set up separate entities as necessary for manipulation.
Should different diligence and documentation rules apply to CFC and non-U.S. digital asset brokers conducting activities as MSBs with respect to the non-U.S. part of their business, and if so, on what basis should a determination be made as to when these different diligence and documentation rules would apply? See Part I.I.4 of this Explanation of Provisions.
1. No. CFC and non-U.S. digital asset brokers conducting activities as MSBs are already registered with the United States and these documentation requirements are not inappropriate.
What U.S. regulatory schemes applicable to a CFC digital asset broker or a non-U.S. digital asset broker other than registration with FinCEN should be sufficient to cause such a digital asset broker to be subject to the same diligence, documentation and reporting rules as a digital asset broker conducting activities as an MSB? How can such digital asset brokers be identified by the IRS? Please also address questions 31 and 32 relating to digital asset brokers conducting activities as an MSB.
1. None other should be added.
Would a rule requiring brokers to obtain documentation on account holders or partners, beneficiaries, or owners (as applicable) of customers that are foreign intermediaries or foreign flow-through entities increase transparency sufficiently to justify the increased burden on brokers? Is that trade-off different for digital asset-only brokers, securities-only brokers, or brokers that effect sales or exchanges in both categories? How frequently and in what circumstances do securities brokers rely on the existing section 6045 regulations to not document account holders or partners, beneficiaries, or owners (as applicable) of customers that are foreign intermediaries or foreign flow-through entities? See Part I.I.5.g of this Explanation of Provisions.
1. No, the market will create flow-through entities that are sufficiently opaque to brokers and the IRS regardless of any set of requirements. The IRS already has information-sharing agreements with other countries in place that would provide this same burdensome information here considered to request from brokers.
Would a coordination provision for brokers that effect transactions involving both non-digital asset securities and digital assets be helpful to brokers, and if so, which proposed rules applicable to digital asset brokers should apply to non-digital asset securities brokers? See Part I.I.6 of this Explanation of Provisions.
1. No. There is no synergy. Non-digital assets securities don’t fit nicely into the new digital assets reporting forms, and vice versa.
Are there additional broker-facilitated transactions involving digital assets that would still be subject to reporting under the barter exchange rules after the applicability date of these proposed regulations? For example, are there broker-mediated transactions that are not reportable payment transactions under § 1.6050W 1(a)(1) with respect to the client that receives the digital assets as payment? See Part I.J of this Explanation of Provisions.
1. No comment.
Is it appropriate to treat stablecoins, or a subset of stablecoins, as digital assets for purposes of these regulations? What characteristics should be considered when assessing whether stablecoins, or a subset of stablecoins, should be treated as digital assets under these regulations? See Part I.K of this Explanation of Provisions.
1. “Stablecoins” are not a distinguishable asset class under the law and therefore regulation should not attempt any definition or exclusions for them.
Should the regulations exclude reporting on transactions involving the disposition of U.S. dollar related stablecoins that give rise to no gain or loss, and if so, how should those stablecoin transactions be identified? See Part I.K of this Explanation of Provisions.
1. “Stablecoins” are not a distinguishable asset class under the law and therefore regulation should not attempt any definition or exclusions for them.
2. Any regulation addressing stablecoins (of which there should be none) should not distinguish U.S. dollar related ones separately, because there is no basis in law for such a distinction.
3. The IRS recognizes that digital assets can “be used for payment transactions” (NPRM, Definition of Digital Assets) and there is an inherent expectation of privacy for payment transactions. Where a digital asset is purchased with the intention of redeeming later with no material gain or loss, and that digital asset is later actually redeemed with no material gain or loss, and that redemption is made as part of a payment transaction, then a reasonable approach is to exempt transaction reporting for that transaction. This balances reasonable privacy considerations versus IRS needs for tracking asset dispositions. This provision should also apply where the “intention” and “actually redeemed” above apply to payment for a specific thing, not a specific dollar amount.
4. Example one: I put twenty dollars into an envelope. Later I remove them when buying twenty dollars worth of pizza. This is not a reportable transaction. Similarly if I put those twenty dollars into a digital asset and expect it to work the same way, and actually there are no material gains then there should also not be any transaction reporting required.
5. Example two: I buy five pizza coupons and put them into an envelope. Later I remove them in exchange for five pizzas. This is not a reportable transaction. (If I sold those coupons at a gain it would be.) These are effectively prepaid pizzas. Similarly if I buy five pizza digital asset coupons and actually use them to buy pizza, then there should also not be any transaction reporting required.
Should any other changes be made to the regulations or other rules to ensure adequate reporting of transactions involving the receipt or disposition of stablecoins? See Part I.K of this Explanation of Provisions.
1. No. Adequacy is already achieved. (While appropriateness is in question.)
In the case of cascading digital asset transaction costs (that is, a digital asset transaction cost paid with respect to the use of a digital asset to pay for a digital asset transaction cost), should all such costs be treated as digital asset transaction costs associated with the original transaction? See Part II.A of this Explanation of Provisions.
1. The only identified scope of this proposed regulation is to reduce the tax gap. Understanding the makeup of “transaction costs” versus sold assets does not reduce the tax gap and should not concern the IRS. Required reporters should instead submit reports appropriately, based on actual facts as they understand them.
Is the allocation of one-half of total digital asset transaction costs paid to the disposition of digital assets for purposes of determining the amount realized and the allocation of the other half to the acquisition of the received digital assets for purposes of determining basis administrable? See Part II.A of this Explanation of Provisions.
1. Yes, but only if the transaction costs can be reasonably valued. And only if the IRS allows recognizing transactions costs at acquisition cost as noted in my other comment.
Would a 100 percent allocation of digital asset transaction costs to the disposed-of digital asset in an exchange of one digital asset for a different digital asset be less burdensome? See Part II.A of this Explanation of Provisions.
1. Yes, it would be less burdensome. This allocation might not actually appropriately reflect the facts of a given transaction.
Are there methods or functionalities that unhosted wallets can provide to assist taxpayers with the tracking of purchase dates, times, and/or basis of specific units of a digital asset upon the transfer of some or all of those units between custodial brokers and unhosted wallets? See Part II.C of this Explanation of Provisions.
1. Most unhosted wallets are created by open source software communities with very limited resources. For comparison it took several years for unhosted wallets to adopt NFTs, and they only barely support some of its features. It is unreasonable to expect that unhosted wallets will generally add these features before 2030.
Should the ordering rules for unhosted wallets be applied on a wallet-by-wallet basis as proposed, or should these rules be applied on a digital asset address-by-digital asset address basis or some other basis? See Part II.C of this Explanation of Provisions.
1. Ordering rules should be based on “substantially similar or related” assets using the same definition from IRS Publication 550 on Investment Income and Expenses. It is just as applicable for digital assets as it is for other assets.
  1. Taxpayers may have multiple wallets and may have multiple digitals assets that are effectively indistinguishable. Therefore ordering rules should be applied in the same way that they apply for non-digital assets.
Are there any alternatives to requiring that the ordering rules for digital assets left in the custody of a broker be followed on an account-by-account basis; for example, if brokers have systems that can otherwise account for their customers’ transactions? See Part II.C of this Explanation of Provisions.
1. No comment.
Should exceptions be made to the ordering rule for digital assets left in the custody of a broker to allow brokers to take into account reasonably reliable purchase date information received from outside sources? If so, what types of purchase date information should be considered reasonably reliable? See Part II.C of this Explanation of Provisions.
1. Any customer-provided information should be considered reasonably reliable. As noted by the IRS, unhosted wallet transactions make up a significant portion of transactions. And it is inappropriate to treat those transactions less favorably than broker transactions.
Should the current rules under section 6045A applicable to transfers of securities from one broker to another remain applicable for securities that are also digital assets prior to the implementation of a later phase of the information reporting guidance? See Part IV of this Explanation of Provisions.
1. Yes, the current rules should remain applicable and they are appropriate.
Who would be the responsible party required to provide the reporting if section 6045B is made applicable to securities that are also digital assets prior to the implementation of this later phase of information reporting guidance? See Part IV of this Explanation of Provisions.
1. The broker who transfers out.
Should any changes be made to the backup withholding rules under existing § 31.3406(b)(3)–(b)(3) or (4) to address digital assets that may also be treated as securities for Federal income tax purposes or to address short sales of digital assets? Are any additional rules needed to address how backup withholding should apply to transactions involving digital assets? See Part VI of this Explanation of Provisions.
1. No changes should be made. Additional rules are not needed.

Additional Questions

Comments are also requested… on the following questions:

Are there any suggestions for what the IRS should consider in planning for the receipt, storage, retrieval, and usage of the information required to be reported under these proposed regulations?
1. The IRS should plan on storing “name and number of units of the digital asset”, the “date and time the payment was made”, the “transaction identification” and “the digital asset address” in a separate storage system.
2. Much of the information submissions required in this proposed regulation are public information, such as “name and number of units of the digital asset”, the “date and time the payment was made”, the “transaction identification” and “the digital asset address” when they apply to transactions on a public blockchain. Because this is public information, unlike other information the IRS receives, this is not classified as “return information” under 26 USC § 6103(b)(2). That means they are subject to Freedom of Information Act requests. Yes really.
These proposed regulations anticipate that reporting brokers may voluntarily engage with acquiring brokers to obtain basis information with respect to transactions in which the reporting broker does not already have adjusted basis information. What would encourage reporting brokers to voluntarily obtain and provide this information?
1. The largest digital asset broker for NFTs by volume is Blur, who is paying, or has paid, digital assets to customers for avoiding doing business with its competitors. See Blur Loyalty Points. The previous largest digital asset broker for NFTs by volume was OpenSea, who is, or did, threaten its customers with demonetization unless they refused to do business with other lower cost competitors. See OpenSea Operator Filter Registry. These activities may violate antitrust laws or 15 U.S.C. § 45(a)(1), but they are effective at growing a business and as far as I know have never been acted on by the government. Where brokers are actively trying to grow their business and they are suppressing competition, we can expect less voluntary sharing of information, including basis information. Ending these anticompetitive practices can encourage reporting brokers to voluntarily obtain and provide this basis information.

Comments are also requested on any other aspect of these proposed regulations…

The proposed regulation creates its own definition of “broker” in (4)(i)(A) that oversteps the boundaries set by its statutory authority cited in 26 USC 6045(c)(1)(D) as amended by Infrastructure Investment and Jobs Act (2021) §80603. This statute defines a broker as “… any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” However the proposed regulation widens this without authority to include persons providing services without consideration and to include other issuers of digital assets that retire their own issuances. Separately, the NPRM asserts an “intention” that its “trade or business” definition does in fact implement “for consideration”. But this assertion cites only Treas. Reg. § 1.6041–1(b)(1); Groetzinger v. Commissioner, 480 U.S. 23 (1987), which are deficient. Treas. Reg. § 1.6041–1(b)(1) specifically includes “organizations the activities of which are not for the purpose of gain or profit”. And Groetzinger v. Commissioner does not clearly show the connection of these two phrases as applicable to this part of IRS regulations. If the IRS has a specific and appropriate citation, that should be provided in the NPRM. Otherwise, the proposed regulation’s definition of a broker exceeds the IRS’s statutory authority.
The IRS recognizes in NPRM that “some digital assets can readily function as a payment method”. Then in the proposed regulation, the IRS expands § 1.6045-1 to require individual-payment-level detail for customer purchases with payment cards and third party network transactions. The IRS is expanding its data collection to every individual thing purchased by taxpayers using these payment methods. This is a much higher level of detail than currently required under 6050W of the Code, “the gross amount of the reportable payment transactions with respect to each such participating payee”. This new data reporting requirement is a) invasive into customer privacy, and b) treats digital asset payment methods much unfavorable compared to cash. The IRS provides no basis for its authority to require payment-level detail. The detail that the IRS is requiring directly violates other applicable laws, such as the Health Insurance Portability and Accountability Act (HIPAA). Additionally, various states have laws disallowing sharing of payment level information in certain circumstances. Therefore, IRS’s publication of this proposed regulation may be inappropriate under Executive Order 13132 “Federalism”. And furthermore, other countries additionally have laws on consumer privacy, which the IRS is usurping in its regulation’s application to foreign companies. For the avoidance of doubt, identifying a customer by their name, address and social security number, a payment amount, and a beneficial payment recipient may, depending on the price list of the vendor, uniquely identify that the specific person performed an abortion or bought a gun. None of the cited authorities allow the IRS to demand payment details for abortions, purchases of guns, or any other transactions, based on whether they were purchased using a crypto credit card versus a conventional credit card (which physically look the same)!
See also the SEC rulemaking process for “Customer Identification Programs for Broker-Dealers” when they implemented the USA PATRIOT act, at “Four commenters suggested…”. https://www.sec.gov/rules/2003/04/customer-identification-programs-broker-dealers This analysis considered commenters’ suggestion to make SEC rules consistent with banking rules. The suggestion was accepted and the provisions were only applied to ongoing customer relationships. The IRS should also find inspiration here to limit information return requirements to ongoing relationships.
In NPRM, Background on Digital Assets and Virtual Currency: A definition is made of digital assets as having an “owner” based on “whether directly or indirectly through a custodian, the keys to the digital assets and, thus, the ability to transfer those digital assets.” This definition is not consistent with how digital assets are owned. Digital assets don’t have keys. It is possible for me to create digital assets that, according to proposed regulation, are not owned by anybody (any person). Inversely, it is possible for me to create digital assets that, according to proposed regulation, are owned by everybody. This would require all 16 million (IRS estimated) crypto customers to recognize each transaction on their tax filings and it does not fall under any exemptions in the proposed regulation (including the airdrop exemption). Digital assets do not necessarily work like other assets types and the current proposed regulation’s definition/understanding of ownership is gamable.
In I Background on Digital Assets and Virtual Currency: A statement is made that some “digital asset trading platforms do not have access to the private keys… of their users’ digital assets” and a footnote note is made that they may be able to exercise “effective” control. Please note that digital asset trading platforms without private keys often can and do have backdoors in them. For example, OpenSea, a large digital asset trading platform does, or previously did, allow its operators to take possession of any non-fungible token (NFT) created on its platform. This is explained at https://blog.phor.net/2022/11/04/Does-OpenSea-Shared-Storefront-have-a-backdoor
In NPRM, Background on Digital Assets and Virtual Currency it is asserted that “NFTs are popular investments”. A citation is missing for this assertion.
The proposed regulation makes “position to know”, “nature of the transaction” and “digital asset middleman” definitions based on whether a person “maintains sufficient control or influence over provided facilitative services”. According to this definition, Amazon Cloud, Google Cloud, Comcast, Verizon, Apple, Dell and thousands of other technology hardware and service providers, judges (in all jurisdictions that can issue writ) and the National Security Agency (which does modify the contents of web pages in-transit) all meet the definition of a digital asset middleman subject to the information reporting requirements. This definition is inappropriately broad and should be modified to exclude common carriers and similar providers.
Digital assets brokerages are distinguishable from existing regulated stock brokers in that contact can be made with customers using only digital communication (as recognized by NPRM). These relationships can be consummated using documentary evidence provided by the customer, with no verification, and no connection to existing US bank accounts. Now consider that names, address and social security numbers are often published in bulk online, such as from the Office of Personnel Management, Equifax or other data breaches. Now also consider that digital assets can be created by anybody, their “market value” can be easily manipulated, and they can be transferred. This proposed regulation creates the unique opportunity that somebody, acting in a fraudulent way, will generate any amount of capital gains and assign them to anybody. If one is careful, this can be done anonymously, without any recourse to the perpetrator. This is the financial equivalent of SWATing somebody. How would a random taxpayer like to receive a letter from the IRS saying “We have evidence to believe you have made $1 billion in crypto gains you forgot to tell us about. Amount due $408 million. Official Business. Penalty for Private Use, $300.” Because the proposed regulation opens a new vulnerability of false information reporting, the IRS should please explain during the comment period which operational controls and new notifications to taxpayers it will make to address this new concern of IRS SWATing (“CGTing”?)
The proposed regulation “Facilitative service” definition EXCLUDES the “selling of hardware or the licensing of software for which the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger if such functions are conducted by a person solely engaged in the business of selling such hardware or licensing such software”. But this definition INCLUDES the selling of the same hardware or the licensing of that same software if it also comes with bubblegum. (See “solely”.) Such a definition is arbitrary and capricious.
The proposed regulation requires a broker to make substantial information report decisions based on how it “previously classified an individual customer”. Therefore this proposed regulation imposes a permanent recordkeeping requirement. Such a requirement is incompatible with data deletion laws. In addition, it is incompatible with other state and foreign data laws. A more appropriate requirement is to determine based on the records available to a broker at that time.
The proposed regulation requires a broker to make customer determinations based on “if, before… the broker collects documentation… of the following U.S. indicia…”. This proposed regulation here imposes a permanent recordkeeping requirement for these indicia records. Such a requirement is also incompatible with data laws.
There must be a provision for digital assets which are meant for test purposes only or which are explicitly designed to have no actual monetary value ever. Currently, the proposed regulation is missing this and it will cause confusion for parties affected by the proposed regulation. For example, Bitcoin has a test network “BTC test net”, there are others. Every operational blockchain network I know of has one or more similar networks. Therefore, seemingly, the majority of blockchain networks are test networks. These networks often allow anybody to receive for free or a nominal fee a large amount of digital assets. These assets are quoted with nominal market prices that can be any arbitrary number. For example, I have received assets for free that were immediately quoted as having a value exceeding the United States gross domestic product. You could also get similar tokens. And we could trade them. These networks are important for creating and testing software, including software that will be created to apply any proposed regulations. These networks are often characterized as having a sunset date where they will be turned offline. For example, the Ethereum Foundation, who centrally controls all changes in the Ethereum software and has the ability to move anybody’s digital assets in exceptional cases, has created test networks and set scheduled sunset dates for them.
“Please send 5 Bitcoin directly to address 34xp4vR….” This is a request. I assert that this request is free speech under the first amendment of the US constitution. However, the proposed regulation, under § 1.6045-1(b)(14)(iii), unduly chills such speech by classifying the person who says it as a “third party settlement organization”. Therefore the proposed regulation violates the first amendment.
In proposed § 1.6045-1(b)(14) Example 14: Third party settlement organization as digital asset payment processor, this example contains a contradiction in the given facts. CPP is asserted to be a “third party settlement organization” which under existing § 1.6050W–1(c)(2) requires to “make payments” or to “guarantee payments”. However in this example’s other facts, customer R makes direct payment to merchant Z. This contradiction is irreconcilable.
In proposed § 1.6045-1(b)(17) Example 17: Effect, and digital asset middleman, the facts establish that Business P2X has modified (and deployed) an open source automatically executing contract which generates a flat transaction fee to themself. However, resting on no further facts in this direction, the analysis concludes that P2X has the ability to alter this automatically executing contract and subsequently classifies them as a digital asset middleman. This logical deduction is not sound. Please note that many automatically executing contracts cannot be altered by anybody. Also, even if it could be altered, the IRS exceeded its authority when it prescribed that the P2X business must change its fee structure from flat-fee to percentage-based. Again, the root cause of this error is in the definition of “nature of the transaction”. The sentence “… a person with the ability to change the fees… ability to determine… rise to gross proceeds” is incorrect. Instead, the predicate for knowing the nature of the transaction is correctly stated as the person that provided the matching order to the customer from a source other than the distributed ledger.
In proposed § 1.6045-1(b)(23) Example 23: Digital asset middleman, this example could go further. The qualifier “except S does not provide…” could also carve out “except S does not provide or use its trade dress to link to…”. Any more clarification that can be baked into that example will greatly help this proposed regulation to meet its objectives.
In proposed § 1.6045-1(b)(26) Example 26: Digital asset and cash, there is a typo, it should read “seeking to make trades”.
In proposed … (8)(iv)(B) Example 2: Digital asset representing real estate, the analysis assumes that L stole the real estate from S without recognizing any capital gains on the theft. Please identify the substantive law that allows this classification, asking for a friend.
Regarding proposed regulation rules for non-U.S. digital assets brokers not conducting activities as MSBs, sale treated as effected at an office inside the United States as a result of U.S. indicia. The indicia requirement 4 can compel a foreign broker to make determinations of every digital asset deposit and withdrawal to consider whether they were to/from a broker organized within the United States. This proposed regulation’s standard is on a “knows or has reason to know” basis. It is not appropriate for the IRS to question the reasoning of how non-U.S. entities derive facts. The standard should be “actually knows”.
The NPRM claims “The treatment of any particular type of digital asset as reportable under these proposed regulations is not intended to imply any characterization of that type of digital asset as a matter of substantive law.” This statement is false. In actuality, this proposed regulation defines “Computation of gain or loss for digital assets” for an asset class that the NPRM estimates “to be valued at around $1 trillion” and “number of taxpayers that are expected to report gain (or loss)… [of] 14.5 million”. Definition of tax gains with this size effect are a matter of substantive law. If any determinations or processes were followed through the NPRM as applicable under the Administrative Procedures Act (or similar) depending on the classification that it is not a matter of substantive law, then such NPRM is invalid.

II Comments on collection of information

Comments are specifically requested concerning…

Whether the proposed collection of information is necessary for the proper performance of the duties of the IRS, including whether the information will have practical utility (including underlying assumptions and methodology);
1. The proper duties of the IRS do not include monitoring transaction-level details for consumer payments. To the extent that the proposed collection of information includes transaction-level details and does not give rise to material income or intended gains and losses, no, that proposed collection of information is not necessary for proper performance of the duties. And likewise, such unnecessary information collection does not have practical utility for legitimate IRS duties, underlying assumptions or methodology.
The accuracy of the estimated burden associated with the proposed collection of information;
1. The estimated burden only considers digital assets similar to Bitcoin and pictures of animals.
2. The relevant code and regulation also apply to (although unhelpfully avoid specifically mentioning) credit card/travel/airline/retail loyalty points programs. Whereas these loyalty programs are used by at least ten times more taxpayers than Bitcoin, pictures of animals, et al., the estimated burden is understated by this factor.
3. Small entities, including individuals, other than the brokers, will need to apply new rules for calculating their gains on digital assets. Moreover, as the NPRM already identified, many individuals use unhosted wallets, which offer no assistance in tax return preparation. These people will be required to calculate gains by hand, a task few people have ever done. And they will be required to make determinations about which assets are similar under the regulation, which will likely be different than the marketing claims applied of the digital assets when purchased (e.g. are Mutant Apes similar to Bored Apes? is trading a liquidity pool token “similar” to underlying, is v3 Uniswap the same thing as v2?). The provided estimate of 9 minutes is underestimated by at least two orders of magnitude.
How the quality, utility, and clarity of the information to be collected may be enhanced;
1. The information reporters could be required to provide the information contemporaneously, within minutes of the transaction. This should only apply to information reporters beyond a certain dollar value threshold. The IRS could make this information available to taxpayers contemporaneously on its website, allowing them to annotate or correct information directly there.
How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and
1. Contemporaneous reporting minimizes burden because that means it is running on automated processes.
2. Contemporaneous reporting maximizes accuracy because it removes humans from the equation, who are highly motivated to send inaccurate information.
3. The proposed regulations can minimize or limit the penalty of inaccurate filings specifically when using contemporaneous reporting.
4. The IRS can provide better documented tools for uploading contemporaneous reports, including example tools, on its GitHub account.
Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
1. No comment.

III Comments on Regulatory Flexibility Act, number of entities affected

The Treasury Department and the IRS invite comments on… the number of entities affected…
1. The number of entities affected includes most everybody that uses credit cards or travels in the U.S. This is hundreds of millions of people. But the NPRM only considers people selling Bitcoin and pictures of animals (and similar) and heavily underestimates the number of entities affected.
The Treasury Department and the IRS invite comments on… the economic impact on small entities.
1. The NPRM estimates that “between 600 and 9,500” issuers will be impacted, which exactly matches the number of estimated affected brokers. Mathematically, this means it is estimated that zero individual filers will be impacted. Whereas this proposed regulation includes rules affecting individual taxpayers (§ 1.1001–7 Computation of gain or loss for digital assets), and whereas individuals meet the definition of “small entities” as per cognizant Small Business Administration definition, now therefore an estimate of zero is inappropriate.
2. The NPRM estimates an impact on “between 600 and 9,500” issuers, which precisely coincides with the estimated number of brokers affected. This correlation suggests that the calculations do not account for any impact on individual filers, an oversight given the proposed regulation’s inclusion of rules pertinent to individual taxpayers (see § 1.1001–7 for the Computation of gain or loss for digital assets). Considering that these individuals fit the “small entities” criteria as defined by the Small Business Administration, the assumption that no individual filers will be affected is a glaring inconsistency and, thus, cannot be deemed accurate.

Sincerely,

William Entriken

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