US House Votes to Reverse IRS Crypto Rule: What Changes Will The Industry Face?

The U.S. House of Representatives voted in large numbers on Tuesday to overturn an IRS rule that would require cryptocurrency platforms, such as decentralized finance (DeFi) projects, to report and collect taxpayer transaction information. The move, accomplished through a bipartisan 292-132 vote, is one of a series of efforts to resist regulations that most anticipate will slow growth in the digital asset space.

The New Rule

The rule was based on the 2021 Infrastructure Investment and Jobs Act provisions intended to lengthen tax reporting of cryptocurrency transactions. If finalized, it would obligate DeFi platforms and crypto exchanges to gather and report to the IRS vast amounts of user transactional data in the same manner as banks must.

Supporters of the rule argued it would improve tax compliance, curb illicit financial activity, and help fund infrastructure projects. The IRS estimated the rule could recover billions in unpaid taxes. However, opponents, including industry leaders and lawmakers from both parties, contended that its broad scope could negatively impact U.S.-based crypto innovation.

Concerns Over the Impact on Innovation

Critics of the rule, including House Ways and Means Committee Chairman Jason Smith, raised concerns about its practicality and potential consequences for American businesses. Smith argued that DeFi platforms, unlike centralized exchanges, lack access to the necessary user data to comply with traditional reporting standards. Since DeFi operates on blockchain protocols without intermediaries, enforcing the IRS mandate would be near impossible.

North Carolina Rep. Tim Moore put these concerns into words, arguing that the rule exceeded the spirit of the 2021 legislation. He warned that the rule would place unnecessary burdens on software programmers, crypto companies, and blockchain initiatives, and this could cause innovation to flee overseas. 

Some industry stakeholders were worried that draconian compliance regulations would compel companies to shift to more welcoming jurisdictions for cryptocurrencies, such as Singapore, Switzerland, or the United Arab Emirates.

The Heated Debate in Congress

Despite the bipartisan pressure for the repeal of the IRS rule, some Democrats oppose the resolution, arguing it would weaken steps to ensure tax compliance. Illinois Representative Danny Davis compared reporting cryptocurrencies to stock brokerage transactions, in which brokers report to the IRS the sales that they make. He said that independent reporting ensures taxpayers report revenues accurately.

Texas Rep. Lloyd Doggett was stern, calling the resolution “special interest legislation” that would enable the system to be exploited by unethical individuals, including tax evaders and criminal syndicates. He also cautioned that repealing the rule would increase the national debt by nearly $4 billion.

What’s Next for Crypto Regulation?

The Senate already voted to repeal the IRS rule, and it needs to pass the resolution again before it goes to the White House. Advisers to former President Donald Trump have called on him to sign it into law if it gets to his desk. On the other hand, the Biden administration and congressional Democrats may need to explore different methods of regulating and taxing the crypto universe without going through Congress.

The IRS crypto rule controversy is only one among the much larger debates surrounding the regulation of digital assets in America. The lawmakers are still grappling with fundamental questions such as how to apply tax regulations without stifling innovation, the limits of financial anonymity, and whether DeFi platforms are a unique asset class or not.

Currently, the House’s action to repeal the IRS rule is seen as a win for blockchain startups, DeFi developers, and crypto users. If enacted into law, United States-based cryptocurrency platforms will be exempted from burdensome broker reporting requirements, thus avoiding administrative burdens and compliance expenses. That being said, it is still necessary for cryptocurrency investors to report their capital gains and losses to the IRS.

While the Senate prepares for a do-over and the Biden administration weighs its next move, the future of cryptocurrency regulation in the United States remains anyone’s guess. One thing, however, is sure: the battle for crypto’s proper place in the financial system is far from over.