IRS Digital Assets Plan Would Be a Setback for Taxpayer Services

Proposed IRS tax reporting rules for digital assets are antithetical to the agency’s mission to provide quality taxpayer services for all Americans and enforce tax laws fairly and efficiently.

It’s important that US tax rules are updated to fairly capture new innovations in finance—and cryptocurrency is no exception. But instead of collecting relevant transaction data, this expansive rule would set a dangerous precedent, capturing consumer data at a scale that would undermine IRS capacity to perform essential functions, with harmful consequences for taxpayer services.

When Congress passed the Infrastructure and Jobs Act in 2021, the law included a provision requiring the IRS to establish digital asset tax reporting rules aimed at capturing taxable transactions, similar to existing requirements for traditional finance.

There’s no question this is a necessary update to our tax laws and supports effective and efficient tax administration. By some estimates, the non-compliance rate for taxpayers with digital assets is 75% or more, representing, by itself, a potential tax gap of billions of dollars in lost revenue for the US.

To solve this problem, we need to provide clear and reasonable rules for brokers and consumers mandating reporting of certain digital asset transactions. But current proposals go well beyond this need and establish reporting requirements with no comparison to traditional finance.

The rules consider nearly every digital asset transaction to be a potentially taxable event, suggesting that billions more transactions in digital assets need to be reported for tax purposes than shared now by traditional finance brokers. The volume of data this would generate for the IRS would overwhelm the agency and have little or no value to effective and efficient tax administration.

At best, an untold amount of staff and technological resources would be tasked with processing billions upon billions of data points—most of them irrelevant to payers’ tax obligations.

At worst, the agency may not be able to absorb all of the data required under the proposed rules in a reasonable time, creating a backlog of everyday tax returns with unreasonable processing times. This would undermine the mission of the IRS to provide quality customer service, at a moment when the agency has been successfully improving on these essential duties.

Under either circumstance, the time and resources spent will have grave repercussions for taxpayer services, as well as hinder the IRS’s ability to focus resources on essential work such as pursuing wealthy non-filers, those involved in potentially abusive transactions, and other forms of non-compliance.

The breadth of the proposed rules also raises significant privacy concerns. Digital assets serve numerous purposes, many of which go well beyond the traditional contours of finance. Under the rule as proposed, the IRS would receive reports—including each and every consumer transaction using digital assets—even if they don’t have a financial or investment purpose.

Imagine if each credit card swipe for a cup of coffee or copay at a doctor’s office were reported to the government. That is exactly the kind of superfluous information that would be captured under the new proposed digital asset rules, and is a precedent for invasion of consumers’ personal financial privacy that we don’t want to set.

Taxpayer trust in the capabilities of the Treasury Department and the IRS is essential to the country’s financial infrastructure. As IRS commissioner, I took this to heart. We secured critical funding of a net of almost $60 billion over 10 years to improve staffing, customer service calls, processing efficiency, compliance, technology, and core functions.

Continued progress on these fronts should be an unquestioned goal for the Treasury and IRS. There must be a modern, comprehensive reporting system for digital assets that is fair and reasonable, and creates parity with reporting systems in traditional finance.

But as written, the proposed rules far exceed this mandate and will hurt efforts to improve other critical IRS operations, including taxpayer services, enhanced compliance efforts, and the agency’s basic ability to fulfill its core mission.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Charles Rettig was IRS commissioner from 2018 to 2022. He is a board member of K1x, a digital K-1 packet production platform, senior adviser for Optifino, a life insurance fintech company, and for Deep Cognition, an AI-based data entry company.

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