In a recent panel discussion at the Crypto Finance Forum (CFF), moderated by Tremaine Hudson, Sr. Accounting Strategist at Cryptio, with industry experts Nik Fahrer, National Tax Senior Manager at Forvis, and Anthony J Tuths, Asset Management Tax Senior Partner, Digital Asset Group Leader at KPMG, delved into the evolving landscape of cryptocurrency taxation. The discussion revolved around recent IRS and Treasury regulations, shedding light on their impact and implications for the industry.
The conversation kicked off with a reflection on the industry's attempt to categorize crypto akin to traditional broker-dealers. Nik highlighted the recent proposed regulations for 1099 reporting, emphasizing the significant inclusion of DeFi in these regulatory frameworks. Nik urged industry players to recognize the industry's image as one that potentially encourages illicit finance and to actively participate in the comment submission process to propose innovative compliance solutions.
“Most of you are probably aware that about three weeks ago, the Treasury and IRS released new proposed regulations for 1099 reporting. And one thing that I want to point out as a part of those regs is that DeFi is largely wrapped into those 1099 reporting regs... We work in an industry that is largely seen as an industry that encourages illicit finance. Now, whether we believe that or not, that's what other people are seeing.”
Nik Fahrer, National Tax Senior Manager at Forvis
Anthony echoed Nik's sentiments, expressing his encouragement for the accelerated pace of regulatory guidance. He stressed the necessity of preventing large financial transactions from occurring anonymously, addressing concerns related to money laundering and terrorism financing. Anthony emphasized the government's focus on closing reporting gaps and highlighted the challenge of applying traditional stock reporting rules to the diverse and decentralized infrastructure of the crypto market.
“There's a myriad of places I can trade crypto and some of them don't even have people. So it's a different infrastructure. It's horribly difficult to implement the rules that they want to implement. ****So when you ask the questions, is it okay to use the same rules? It's okay, but we're going to have to make some fixes.”
Anthony J Tuths, Asset Management Tax Senior Partner, Digital Asset Group Leader at KPMG
Nik further encouraged proactive engagement with the proposed regulations, emphasizing the industry's opportunity to provide constructive suggestions for the reporting system. He suggested a collaborative effort to showcase a willingness to comply while proposing innovative alternatives to the outlined regulations.
“We have the opportunity here to submit comments to the IRS in the next 40 days or so. As a part of those proposed regs, they asked for suggestions on how this reporting regime should work. And so I would encourage all of us to come together and instead of trying to voice our opinions as to why these regs suck and largely may drive innovation offshore, let's try to come up with a way that is innovative and this is an opportunity for us now to say, okay, we may not agree with what you guys have laid out right now, but here's another way that we can comply.”
Nik Fahrer, National Tax Senior Manager at Forvis
Anthony expressed skepticism about a potential reversal of the proposed regulations, emphasizing the need for the industry to adapt to existing reporting frameworks. He acknowledged the efficiency of traditional stock reporting rules but acknowledged the challenges in applying them to the distinct infrastructure of the crypto market.
“I'd be shocked if they're going to reverse course, throw out this stock basis reporting framework and go with something new.”
Anthony J Tuths, Asset Management Tax Senior Partner, Digital Asset Group Leader at KPMG
The discussion then shifted to the varied impact of regulations on different entities within the crypto space. Anthony highlighted the broader scope of entities affected, extending beyond traditional broker-dealers to encompass any party facilitating transactions, including unexpected participants such as gaming companies.
“One of the first calls I got when these regs popped out was a very large gaming company. And they said; you know we have play to earn in our platform and we'll actually pay people out in USDC for something. Who would have thought a gaming company would have to report? Now, on the flipside, they were careful about that. They said if it’s insular or if it's all in-game, you don't cash out, you don't have to report. But that's not the way gaming is going, right?.”
Anthony J Tuths, Asset Management Tax Senior Partner, Digital Asset Group Leader at KPMG
Additionally, Anthony underscored the difficulty of implementing rules designed for traditional securities in the unique crypto market, which features a multitude of platforms with diverse infrastructure.
Nik emphasized the potential challenges and opportunities presented by the proposed regulations. He pointed out the exclusion of miners and stakers as a positive aspect, but also raised uncertainties regarding reporting obligations for DeFi entities using aggregators.
“If I'm not keeping accurate records or if I'm not using an aggregator a crypto accounting aggregator like Cryptio, I'm kind of celebrating because this gives us even more incentive or taxpayers even more incentive to use a platform like Cryptio to aggregate all of their cost basis for their transactions because they're going to get 1099 DAs without cost basis, they're going to get 1099 DAs from centralized exchanges with cost basis, and they may be performing transactions where they don't get it to 1099 DAs at all.”
Nik Fahrer, National Tax Senior Manager at Forvis
Anthony discussed challenges related to duplicate reporting and the need for an efficient system to avoid information redundancies in the reporting process. He acknowledged the industry's need for innovative solutions to accommodate the distinctive infrastructure of the crypto market.
“The problem is the infrastructure that's running crypto is wildly different. There are only so many places on God's earth you can trade a publicly traded stock... So it's horribly difficult to implement the rules that they want to implement.”
Anthony J Tuths, Asset Management Tax Senior Partner, Digital Asset Group Leader at KPMG
Shifting gears, the experts explored the IRS's treatment of staking rewards. Nik broke down the different forms of staking rewards, including gas fees, MEV, and inflationary rewards, suggesting that the argument against immediate inclusion in gross income might be more applicable to inflationary rewards.
“From an overall perspective, I think that there were some arguments that they shouldn't be includable in gross income at the time that they received and should instead be includable in gross income at the time that they're converted.”
Nik Fahrer, National Tax Senior Manager at Forvis
Anthony shared his perspective on the revenue ruling regarding staking, acknowledging that the dominion and control principle was administratively pragmatic, despite potential challenges for conservative taxpayers. He anticipated future litigation on the issue.
"I think the revenue ruling that came out on staking... it just becomes administratively difficult... I think, for those of us who have been keeping an eye on this over the years, this is the way we at KPMG have been doing it anyway.”
Anthony J Tuths, Asset Management Tax Senior Partner, Digital Asset Group Leader at KPMG
In conclusion, this insightful panel discussion provided a comprehensive overview of the current state of cryptocurrency taxation, dissecting the implications of recent IRS and Treasury regulations. The discussion underscored the industry's pivotal role in shaping these regulations through active participation and innovative suggestions. From the challenges of categorizing crypto akin to traditional broker-dealers to the intricate landscape of staking rewards taxation, the experts delved into the intricacies of compliance in this rapidly evolving space.
The call for collaboration, adaptability, and the use of platforms like Cryptio to navigate reporting complexities resonated as key takeaways. As the crypto tax landscape continues to evolve, industry stakeholders are urged to engage proactively, fostering a dialogue that contributes to the development of effective and practical tax techniques in the digital asset space.
Want to learn more about the Crypto Finance Forum? Visit our YouTube channel to re-watch all the panel sessions, and the CFF blog to read each recap.