Welcome to the third edition of Chain Reaction. Our team is actively monitoring for developments in the cryptoassets industry. We closely track legislative and regulatory changes, summarizing important tax considerations and implications you need to know for your business.

Adding another cook to the kitchen: CRS serves up summary of current crypto reporting requirements and related policy proposals

The Congressional Research Service (CRS) recently released a report summarizing existing IRS and FinCEN reporting requirements relating to cryptocurrency transactions as well as certain recent legislative proposals, including H.R. 3684, as passed by the Senate. The CRS report also discusses the various policy considerations underlying the legislative proposals, including the highly publicized concerns of certain stakeholders with respect to Senate-passed H.R. 3684’s definition of “broker.” The CRS report also addresses the policy considerations relating to the delicate balance between the rights of cryptocurrency investors and the right of the government to collect data necessary to enforce existing law.

Eversheds Sutherland observation: The CRS report notes that the JCT has scored this provision of H.R. 3684 to raise significant revenue, but acknowledges that those estimates may be speculative. Moreover, revenue associated with this proposal may further be reduced to the extent that the underlying transaction is undertaken now or in the future with an intent to improperly avoid tax. In other words, the CRS report concludes that certain information reporting relating to cryptocurrency transactions is warranted and is likely to assist taxpayer compliance without increasing taxpayer burden. However, the CRS tacitly acknowledges that if the information reporting rules associated with cryptocurrency transactions are unduly burdensome or easy to avoid by undertaking transactions using a non-US broker and effecting the relevant transaction outside the United States, the provision is unlikely to reduce the tax gap and may lead to further noncompliance.

To be clear, the CRS report warns that enhanced tax information reporting and strengthening of associated FinCEN reporting associated with cryptocurrency transactions, even if undertaken in an appropriate manner, may nonetheless drive the industry outside the United States and lessen the ability of the United States to effectively regulate or collect tax with respect to cryptocurrency transactions.