Transcript Available of IRS Hearing on Digital Reporting Regs

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TELECONFERENCE PUBLIC HEARING ON PROPOSED REGULATIONS

“GROSS PROCEEDS AND BASIS REPORTING BY BROKERS AND DETERMINATION OF AMOUNT REALIZED AND BASIS FOR DIGITAL ASSET TRANSACTIONS"

[REG-122793-19]

Washington, D.C.

Monday, November 13, 2023

PARTICIPANTS:

Speakers:

JESSALYN DEAN
Ledgible

WILLIAM ENTRIKEN
Phor

LAWRENCE ZLATKIN
Coinbase Global Inc.

GINA MOON
Ozone Networks Inc d/b/a OpenSea

SHEHAN CHANDRASEKERA
CoinTracker

MARISA T. COPPEL
Blockchain Association

LINDSEY CARPENTER
National Taxpayers Union Foundation

RYAN LEVERETT
Self

CARLO D'ANGELO
DeFi Defense Lawyer

TAVARUS BLACKMON
Tavarus Blackmon Art

RORY RAWLINGS
Blu Canary Capital LLC

SEAN MCELROY
KEVIN KIRBY Fenwick & West LLP

* * * * *

PROCEEDINGS

(10:00 a.m. )

MODERATOR: I am the moderator of today's hearing. Panelists at today's hearing include counsel with the IRS Office of Chief Counsel Procedure and Administration, and attorneys with the Treasury Department's Office of Tax Policy. Our hearing will have 13 speakers who previously requested to speak at today's hearing. Each speaker will have 10 minutes to present their comments. At one minute prior to the end of each speaker's 10-minute period, the operator assigned to this call will cut in to warn the speaker that only one minute of speaking time remains. The operator will then mute the speaker's microphone when the 10-minute period allotted to that speaker has ended. The panel members may then either pose questions to that speaker or turn to the next speaker. With that, the first speaker is Jessalyn Dean from Ledgible.

MS. DEAN: Thank you. Can you confirm that you can hear me?

MODERATOR: I can hear you.

MS. DEAN: Great. Good morning, everyone. I'm Jessalyn Dean and I'm the vice president of tax information reporting at Ledgible. On behalf of the team at Ledgible and our CEO Calcanti (phonetic), we're thankful for the opportunity to participate in the legislative process of tax reporting over digital assets. Crypto and other digital assets are currently facing the unprecedented prospect of 1099 tax reporting over transactions where substantive tax law about those transactions is still unsettled. In contrast, the traditional financial services industry has had the benefit of decades of largely settled substantive tax law before being required to layer 1099 tax reporting on top of those transactions.

The traditional financial services industry has also been given far more time to implement various components of tax reporting while the digital assets industry is being given a shockingly short window to stand up their entire operating models. Indeed, gross proceeds reporting on Form 1099-B was in place for 20 years before cost basis information was required to be reported by traditional securities brokers. Though native crypto tokens and NFTs [non-fungible tokens] are facing the brunt of the short implementation window offered by the IRS, a subset of digital assets called tokenized securities and tokenized real estate already have existing tax reporting obligations to comply with tokenizing of securities and real estate creates a digital receipt of ownership but does not necessarily create new financial products. Because of this, some of the largest names in traditional financial services are embracing tokenization, even where they have shied away from native crypto tokens and related services.

Long-standing, heavily regulated financial institutions are entering the tokenization market in order to leverage blockchain technology to innovate back-office infrastructure and shareholder record keeping. Names you can find in the news offering tokenized financial products in the U.S. include Wisdom Tree and Franklin Templeton, and abroad include Deutsche Bank and HSBC, increasing speed of transactions, increasing efficiency, and reducing costs to investors. Tokenization is not just the future of blockchain technology; it is here today in the types of products that the IRS and taxpayers are already familiar with and are subject to existing tax reporting requirements. I will address the remainder of my remarks to two categories of tokenized financial products, 1940 Act mutual funds and real estate.

1940 Act mutual funds, particularly subchapter C corporations and subchapter M RCIs [regulated investment companies], today fall under existing 60/45 broker regulations. Sales or exchanges of these mutual funds are reportable on 1099-B reporting the proceeds and basis information. Reporting of gross proceeds on sales or exchanges of mutual funds dates back to the 1980s, and in 2011, mutual funds began reporting cost basis information in addition to gross proceeds.

One very important exception to Form 1099-B reporting is given to money market funds whose stable value means that it is bought and sold at the same price and therefore not reported at all on Form 1099-B, though it may optionally be reported. This exception gives relief to the IRS and to the taxpayer having to process large volumes of unnecessary data for transactions resulting in zero gain or loss. The proposed regulations for digital assets will require tokenized mutual funds by default to be reported on a Form 1099-DA. Recognizing that this is double reporting on a Form 1099-B, the IRS has proposed a coordinating regulation so that sales or exchanges of tokenized mutual funds would only be reportable on the Form 1099-DA and reporting on the B would end.

We at Ledgible strongly disagree with this proposal and insist that 1940 Act mutual funds that are already reportable on a Form 1099-B should remain so. The tokenized mutual fund industry is dominated today by traditional financial institutions. Though the proposed regulations for tax reporting on digital assets were largely written with a distrust of the digital assets industry, there is zero evidence to indicate that tokenized and highly regulated mutual funds offer any heightened risks of noncompliance with tax obligations when compared to their non-tokenized mutual fund counterparts. This is because today most of these tokenized mutual funds do not yet allow for transfers to self-hosted private wallets, peer-to-peer trading, indirect investment through omnibus accounts, or even broker-to-broker transfers.

Most alarmingly, the proposed regulations requiring Form 1099-DA reporting instead of the B reporting, would cause tokenized money market funds to lose their exception to reporting and would therefore create a real de-incentivization to the mutual fund industry to tokenize their mutual funds. For many decades, shareholder record keepers have invested significant amounts of their operating budget into software and infrastructure that is adapted to these existing 1099-B tax form structures. The cost to these brokers would be enormous to overhaul their cost basis and 1099 reporting software and infrastructure for a specific subset of their mutual funds, even though they are economically identical to and regulated in the same way as their non-tokenized counterparts.

These costs would include shifting tokenized mutual funds from reporting on the B to the DA and to start reporting sales or exchanges of money market funds which were exempted under the B rules. In return for such enormous costs to these brokers, the IRS would receive no additional volume of transaction reporting compared to today, nor would they see an increased compliance rate by taxpayers that are already receiving Forms 1099-B for these products. Next, I would like to address tokenized real estate.

In the proposed regulations, the IRS has spent considerable time addressing real estate transactions that involve digital assets. However, the explanation of provisions, the text of the proposed regulations, and the examples all fail to capture and address the reality of most real estate transactions that leverage blockchain technology. In the U.S., the tokenization of real estate is complex in that it could result in a number of different legal structure outcomes. Sales of single pieces of real estate are commonly sold as NFTs, but they still have an LLC interposed as the owner of the real estate, since in all cases we are aware of, an NFT cannot hold legal title to real estate in the U.S. Where real estate is being sold as fractional ownership, there is typically a partnership or LLC interposed as the owner of the real estate for the same reason that I just mentioned, but also to make partial ownership changes smoother.

Even where a partnership or LLC agreement has not been legally drafted, most every tax accountant would agree that a group of unrelated parties agreeing to pool their money together to purchase and hold real estate is a default partnership for tax purposes under the Internal Revenue Code. Another possible structure outcome is that a REIT is formed, a real estate investment trust, and shares of the REIT are then tokenized. This is the case with the most often quoted use case of real estate tokenization, the Aspen Coin, which tokenized fractional ownership of a ski resort in Colorado. However, in the structure outcome, there is no partnership or LLC, and instead you have a tokenized security which falls under existing 1099-B reporting that I discussed in my earlier remarks.

So, why does all of this matter? I mentioned that the IRS has failed to capture and address the reality of most real estate transactions that leverage blockchain technology. This is because investors in tokenized real estate are not buying and selling tokens representing ownership interests in real estate. They are buying and selling tokens, representing ownership interests in LLCs or partnerships, and where an LLC or partnership exists for tax purposes, then Form 1065 and Schedule K-1 reporting will follow the cost basis rules of interest in an LLC or partnership.

OPERATOR: Excuse the interruption. You have one more minute remaining.

MS. DEAN: Thank you. The cost basis rules of interest in an LLC partnership for tax purposes are complex and will never be information that is available to digital asset brokers. Not only is Form 1099-DA reporting therefore completely inappropriate for these transactions, but it will lead to double reporting due to the absence of a coordinating regulation with Schedule K-1 reporting. This double reporting will create meaningless cost basis information and reconciliation nightmares with Schedule K-1 for the taxpayers. We therefore insist that transactions involving tokenized real estate where Schedule K-1 reporting applies should be exempted from the VA reporting in the proposed regs. My comments are now complete, and I thank you for your time.

MODERATOR: Anyone on the panel have any questions? OK, thank you. The next speaker will be William Entriken from Phor.

MR. ENTRIKEN: Hello, everybody, this is Will Entriken. Can you hear me?

MODERATOR: Yes, we can. Thank you.

MR. ENTRIKEN: Great. So, hi, I'm Will Entriken. Brief intro, I am the lead author of this document called ERC-721, which is the beginning of NFTs, which is a target of this regulation here. I've also worked with — I'm a contributor to NIST, the National Institute of Science and Technology, the Standards and Technology, and apart for the paper that they've written defining what are tokens, blockchain tokens. And I've also worked with other governments on their crypto regulation. I have a horse in this race, and I have some opinions here, and I've given pretty extensive comments, but I just have a couple to share on this phone call. And I've got the next 10 years of lawsuits that are coming against this regulation, all tabulated for you, for everybody, to see. Three points.

First, the IRS recognizes that a lot of these tokens are used for payments, and I was surprised to see how many people are actually using the crypto credit cards. It's crazy. And I love the estimates that are in this paper. So, whereas we recognize that these tokens are meant to be used for payments, the IRS does not have authority to require disclosure of some of these payments. Itemized disclosure — we're talking about every time you swipe your card, disclosing that to the IRS.

Just a couple examples. When you buy a gun, does the IRS have authority to require every purchase of a gun to be reported? No. Does the IRS have authority to require every purchase of an abortion to be reported? No. I just picked a couple. But there's a lot of special classes of purchases that there are existing laws where this regulation goes against them. So, if this regulation comes out as is, that's going to be a problem. So, we should more carefully think about what types of things are going to be required for tax reporting because there are lots of specialized classes of purchases and uses of money that are already special cases, and there are no special cases in this regulation.

Point number two, talking about my car. So, today, got my car out and I put gas in it; I'm going to drive to work. Put some gas in there. Driving to work. Now, as you know, gas is a marketable security. You can get futures against it. You can buy it on the market. There's a market price. You can watch it all day. There's even one time the price of gas went negative. That was crazy during COVID, right? But when you're driving your car, when you put gas in your car, there's a specific reason you're putting gas in your car. You're using it to drive. I'm using it to drive. Using it to drive. When's the last time you got in your car? You're like, OK, do you have an app on your phone to track the price of gas as you're driving? No, of course, nobody does that. So, when you put gas in your car, you are using it to drive.

However, under this proposed regulation, as you're driving, every time you put your foot on the gas, you will be reporting that. That's a reportable transaction because it's not gas, it's a security, and that's inappropriate. In fact, every atom of gas that is being used and you've got Avogadro's number — is probably the first time it's coming up in IRS tax call. But it does apply because every time you burn one molecule of gas, that is now a market of security that you have to recognize gain on before you put it in your car to drive that one. I don't know; I don't know what the physical distance a car drives on one atom of gas, but that's obviously ridiculous.

However, but for some definition of car and gas and drive, it does require you to report every one of these transactions. And so, here's a — obviously, this is a stablecoin; this is a car analogy for stablecoins and transaction fees. There's a lot of individual transactions that are using these things. So, I want to propose a really simple rubric that we can use here for this regulation. And the regulation is if you buy a token, if you buy a thing, an asset, digital asset, not digital asset, including gas, right?

If you buy an asset and the intention at the time that you bought it was to use it, not to sell it. And at the time that you use the thing, it was for the intentional purpose, the original purpose. And during that time, if there was no material — I'm going to leave that word undefined because the regulation likewise should do the same — if there's no material gain or loss at that time, then should not be reportable. Likewise, applying the stablecoins. If you bought a stablecoin because you wanted to use it for something and you use it for something and there's no material gain or loss, that's not reportable. If you use [it] to buy a gun, it's not reportable.

However, now, if you do buy a stablecoin or gas for your car or whatever, and then you use it, but there is a material gain, well, then maybe some tax regulation applies. But in a lot of cases, the IRS has already recognized that these assets are being used for payment purposes, payment on cash value. So, that can be like a stablecoin or payment for amount of go in your car, whereas that's more like gas. People are buying these things with the intention of using them. So, that's something that the regulation should make sense of because that's how the existing world works today and the existing tax regulation works today.

Number three, final point. The IRS has put out a lot of regulation here, and obviously there's not a lot of law to go on. So, we've got a couple words in the text, the Jobs Act, and then we've got all this regulation to kind of implement that. And we're trying to guess right? We have to guess what was their intention — how does this make sense? Now in the regulation, there's only one discernible motivation that I found, and the motivation was to reduce the tax gap. OK, so we're trying to reduce the tax gap. We've got this one sentence basically from the Jobs Act: Go regulate crypto. And then we've got 80 pages of IRS regulation. And are we on the mark? Maybe. But there's a huge category of digital assets that none of this is focused on. And in fact, it's much larger than NFTs.

Anything that Coinbase is selling, any of these things, and it is credit card points. Credit card points is a digital asset as recognized under this regulation. Let's review. Credit card points are basically like cash. They can be converted to other types. So, you can get — you've got a Chase credit card; you can transfer those to American miles points. Let's say you can go to Iberia points, which you can get for a plane, or you donate as cash value, plane trips, food. You can use these points for all different types of things. Are they on a distributed ledger? You bet you there's different ledgers across all the different credit card points. And the points are transferable. They have cash value? Absolutely. Do they go up and down in value? Absolutely. Can [you] use them for cash, for services and goods? Absolutely. Do more than 100 million people use them? Yes. So, that's more than 10 times larger than the market for crypto as currently articulated by this regulation.

So, I want us all to be successful here. I want us to reduce the tax gap. These are good goals. I want us to follow the law. And the way we do that is specifically focus. There's an elephant in the room. We're focusing on the mouse here. So, let's focus on the elephant. Let's look at these credit card points and just consider how these are going to follow in here, because otherwise we're missing the whole point. We're reducing the legitimacy of this regulation relation. If there's such a large animal here that we're not even focused on and we're just leaving it, that's it for me. Thank you.

MODERATOR: Anyone on the panel have any questions?

PANELIST: Yes. Thank you for your comments. Question for you.

MR. ENTRIKEN: Yeah.

PANELIST: In your second remark, you suggested that there should be no reporting if a digital asset is used for its intended purpose and there's no material gain or loss. My question is, would that also address your first comment?

MR. ENTRIKEN: Yes, mostly. I can't really imagine a situation where people are buying a digital asset and then later selling it for an abortion. That's kind of weird. But just helping, just, I'm trying to help you guys out. If that does happen and you don't want a lawsuit over it, you might want to have some carve outs on top of the carve out for, you know, intended use cases of stablecoins, slash, things purchased for a specific purpose.

MODERATOR: Thank you. Does anybody else have any questions? OK, thank you. The next speaker will be Lawrence Zlatkin from Coinbase Global Inc.

MR. ZLATKIN: Good morning, ladies and gentlemen. My name is Lawrence Zlatkin. I'm the vice president of Tax at Coinbase. Coinbase welcomes the opportunity to respond in this public hearing to the proposed regulations on broker reporting for digital asset transactions. Coinbase operates the largest and most trusted platform in the United States for customers to buy, sell, hold, and manage digital assets. We're dedicated to working openly and constructively with tax authorities and regulators, both in the United States and globally, to promote compliance with applicable regulatory and tax laws.

Coinbase submitted an initial comment letter on October 12 describing certain thematic and policy considerations related to the proposed regulations. We followed up with a second submission on November 10 with 15 constructive recommendations that we believe would greatly improve the regulations.

The statutory changes made in 2021 in the Infrastructure Act were intended to create parity in tax reporting for digital assets and existing financial investment assets, as confirmed by the accompanying legislative history. We strongly urge the IRS and Treasury to return to its legislative mandate and propose regulations for digital asset tax reporting that are symmetrical with traditional finance. By seeking to expand broker reporting obligations to the sale or exchange of assets that are not used for financial or investment purposes, in many cases resulting in no gain or loss, and to persons who only indirectly facilitate digital asset sales, the IRS has proposed rules that will challenge the agency and its drive towards modernization and efficiency. Moreover, the rules raise serious privacy and policy concerns that should be addressed in a more considered and separate set of regulations or by Congress in the first instance.

In our comments today to the proposed regulations, we make seven overarching observations. First, as we have emphasized earlier, the proposed regulations lack parity with financial services. The Infrastructure Act expanded the tax reporting architecture to digital asset brokers in a manner similar to the traditional financial services entities that serve as the benchmark for broker reporting. Congress carefully crafted the legislative language and it was not intended to cover any and all persons who facilitate and participate in the digital asset economy.

The Infrastructure Act expands the definition of intermediary in section 6045 to include, quote, any person who for consideration is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person, end quote. The plain language of this provision speaks for itself. Congress wanted people who regularly engage in transfers of digital assets on behalf of another person for consideration to file returns that facilitate the accurate reporting and collection of taxes on such transfers. The word effectuate, as prescribed in the legislative text, is defined as quote, to cause or bring about something, to put something into effect or operation, end quote. Effectuating a transaction requires direct rather than tangential involvement.

The proposed regulations far exceed Congressional authorization. Treasury and the IRS have interpreted "broker" to cover industry participants that do not effectuate transactions in digital assets. The rules inappropriately assign broker status for reporting purposes to certain industry participants based on the theory that they indirectly effectuate transfers of digital assets. This overbroad definition of broker captures persons that may contribute or give rise to a transaction even if they do not effectuate it.

The Treasury Department and the IRS have interpreted "intermediary" to include industry participants that do not deal in digital assets. The rules improperly grant intermediary status to certain industry players for reporting purposes on the theory that they indirectly influence the transfer of digital assets. This overly broad definition of an intermediary includes persons who may participate in or lead to a transaction even if they do not perform it, such as providing an automated market maker system; providing services to discover the most competitive buy and sell prices; providing noncustodial wallets that allow users to access trading platforms; providing services that allow access to the internet, including browsers and internet service providers. Including persons within these broad categories of activity stretches the meaning of the statute beyond the breaking point. None of these activities directly effectuates digital asset transactions.

Second, the proposed regulations will create duplicative, burdensome, and fundamentally unadministrable reporting by expanding the universe of brokers in the scope of digital assets. To include any and all persons who facilitate the digital asset economy, the IRS and taxpayers will be bombarded with data, including data related to payments and transactions without any gain or loss.

According to the IRS project director, the agency now expects to receive an astonishing 8 billion — 8 billion — 1099-DA reports annually. The proposed expansion of the digital asset reporting regime will detract from the ability of the IRS and taxpayers to focus on relevant and appropriate compliance where genuine tax liability is created. The proposed regulations also introduce unnecessary reporting burdens through overly expensive transaction reporting requirements. Of particular note, the proposed regulations expressly include a requirement to report all stablecoin transaction activities. However, when a stablecoin is by design a payment instrument with a one-to-one peg to reserve assets denominated in U.S. dollars, the same stablecoin can be transferred from person to person without any gain or loss.

The IRS should exempt stablecoin transactions stablecoin issuers from these reporting requirements. Failure to include — exclude payment stablecoins from reporting requirements will lead to vastly overburdensome ineffective, and inefficient reporting. Tax reporting when there is no gain or loss, including stablecoins, will result in expansive but low-value reporting and should be excluded from the reporting regime.

Third, the proposed regulations require the reporting of data related to everyday use cases for digital assets and to digital assets that are nonfinancial in character. This includes the use of digital assets for everyday uses, such as the purchase of a cup of coffee, or everyday payments of the grocery store, or visits to the doctor. This expansion of the broker reporting regime increases government oversight over taxpayer activity and intrudes unnecessarily into the private lives of ordinary Americans in ways that are largely unconnected to tax. The IRS should not police every digital asset transaction just because of the potential for taxable gain. The broker reporting regime should not be extended to digital asset transactions where there is no gain, such as payments, and where the assets are non-financial in character.

Fourth, the proposed regulations stifle growth in the digital asset ecosystem by imposing rules to directly challenge the use cases for digital assets. The regulations go beyond the scope of reporting taxpayer gains on financial assets and impose burdens that suggest the government is using tax reporting as a tool for deciding which technology should succeed in today's economy. This is an inappropriate interpretation and application of the code.

Fifth, imposed regulations are a missed opportunity to leverage blockchain technology to ensure taxpayer compliance. The rulemaking process should be an important opportunity to develop new ways to leverage blockchain technology to create a modernized and more efficient tax reporting regime. Blockchain technology has the potential to offer new and alternative tax reporting and compliance systems that will achieve the twin goals of transparency and efficiency.

Sixth, the proposed regulations impose an unrealistic timeline for implementation. They require reporting entities to develop a new and complex reporting regime from the ground up in little over a year from the end of this comment period and likely less than a year from the date the regulations are finalized. This contrasts sharply with the more than five-year timeline afforded to financial institutions to comply with the 2008 tax basis reporting regulations, even though financial institutions were already reporting gross proceeds, had preexisting infrastructure in place, and did not have to build new systems from the ground up.

And seventh, the cost estimates and economic burden analysis in the proposed regulations are conclusory and fundamentally flawed. As I mentioned earlier, the IRS's project director for digital assets admitted that the Treasury and IRS's estimates are off by orders of magnitude and that the IRS is not equipped to handle the flood of reporting. The IRS now expects to receive an astonishing 8 billion 1099-DA reports annually, a more than 55,000 percent increase over what Treasury and the IRS estimated in the proposed regulations just a few months ago.

Under your own cost assumption, the volume of reports would mean annual reporting costs of $76 billion and startup costs of $419 billion — almost half a trillion dollars, amounting to approximately a third of the global crypto market cap. The IRS project director also acknowledged that 8 billion 1099-DAs would approximately double the amount of all 1099s the IRS currently receives annually, and that the IRS's current technology cannot handle the volume of reporting. The IRS's director's comments underscored the inadequacy of the Treasury and the IRS's cost-benefit analysis and drive home the need for Treasury and the IRS to slow down, reconsider the scope of the regulations, and resubmit them for meaningful public comment after publishing the draft 1099-DA.

Ultimately, we do not think that reporting every digital asset transaction was intended by the infrastructure —

OPERATOR: Excuse the interruption. You have one more minute. Thank you.

MR. ZLATKIN: It does not promote effective and efficient tax reporting. We would recommend starting with the more than 90 percent of the digital economy that is similar to the existing reporting system, financial and investment assets. Building from the ground up requires a strong foundation.

We greatly appreciate your consideration of our comments proposed, provided in this hearing, and we would be happy to discuss these and other tax policy issues or technological questions with you. We view our mission to provide proactive engagement on tax policy initiatives around the world, and look forward to hearing back from you and helping you develop constructive tax rules for the digital assets ecosystem.

MODERATOR: Thank you. I have a question. Is your testimony that we should not be requiring reporting for digital assets that are not financial in nature? My question for you is: Is it feasible, slash, administrable for brokers to review each digital asset to determine if the asset is a financial-in-nature digital asset?

MR. ZLATKIN: I believe it is, and I believe we could work on something that would definitely fit that paradigm.

MODERATOR: Thank you. We have one other question.

PANELIST: Yes. You proposed that there should not be reporting with respect to stablecoins. Do you have a suggestion for how the term "stablecoin" would be defined?

MR. ZLATKIN: Yes, actually, in our second comment letter, we did provide a rubric for being able to evaluate that which was both objective and subjective. We tried to align it towards a one-to-one peg for a six-month-or-longer period. And we also provided a proposal for a safe harbor where the IRS itself could evaluate whether stablecoins were like mutual funds, and they don't really deviate from one-to-one peg, and so therefore they would include it on the list. But the list could also be inclusive and therefore also exclude a stablecoin that fell outside of the realm of what would otherwise be considered stable. But it's in our second comment letter that we submitted on Friday.

MODERATOR: Great, thank you. Does anybody else on the panel have any questions? Thank you. OK. The next speaker will be Gina Moon from Ozone Networks doing business as OpenSea. Gina?

MS. MOON: Thank you for having OpenSea here today to share our thoughts with you on the proposed broker regulations and NFTs. I'm Gina Moon, general counsel for OpenSea. So, OpenSea is an NFT Explorer and Web3 marketplace for NFTs on public blockchain. We do not take control of our users NFTs or cryptocurrency. Users use their own self-hosted wallets to buy and sell NFTs from one another in peer-to-peer transactions using public blockchain. And OpenSea does not execute the transactions. And we obtain the final details of an NFT transaction from the public blockchain only after that transaction is executed.

As a reminder of what NFTs are: They are identifiable data units in a data infrastructure environment — the blockchain. Unlike fungible tokens, they each have a unique token ID that can be used to track the individual NFT transaction history, and they also have associated metadata and content that travels with the NFT. NFTs can represent rights to a collectible, to art, to music, serve as a membership pass, or a ticket to a concert. They can be used to track vehicle registrations, as video game items, and many other things. This is because NFTs are blank slates. They're like pieces of paper. They can be used to represent a variety of things. And they can also be used to represent rights to financial instruments such as a stock, bond, debt, note, or currency. This is not a common usage of NFTs at present.

NFTs do not have a market price the way that cryptocurrencies may have on a crypto exchange. And NFTs in the same collection may have significantly different resale prices, not just because their content is different, but because of their unique ownership history.

So, turning to the broker regulations with respect to the digital asset definition, the statutory definition for digital asset in 6045, as amended, governs only those things that are a representation of value. Although collectible and similar NFTs may have value, as do many consumer items, they are not representations of value. So, the plain language definition of digital asset in the statute indicates that Congress viewed "digital asset" to mean a type of financial instrument. 6045(g)(3)(d) also was amended to include digital assets in a list of financial instruments. And digital asset is placed after securities, commodities, and debt notes, but before the category of "and any other financial instrument."

Again, indicating "digital assets" in the statute refers to types of financial instruments. The look-through analysis the IRS proposed in Notice 2023-27 earlier this year is well suited to differentiate what should and should not be reportable as a digital asset. The approach in the proposed regulations contravenes this look-through approach in that notice. Consistency across Code provisions is critical to reducing confusion both by taxpayers and reporting entities. Subjecting only financial instrument NFTs to broker reporting is consistent with other regulatory frameworks as well, such as status approach to virtual assets, DAC8, and OECD [cryptoasset reporting framework], which have identified that investment and payment NFTs are different than collectible NFTs and other types of NFTs we've discussed today. Consistency across regulatory regimes will also help to reduce taxpayer confusion and allow for better reporting by entities.

With respect to the broker definition in the regulations, by including indirect facilitative services, the proposed regulations include far more in the parameters of "digital asset middleman" than what is included in the statutory language for broker. In practice, this broad definition of broker will result in duplicative reporting, the collection reporting of the same information by multiple parties in the NFT ecosystem. For example, if a user accesses a website or multiple websites to discover the most competitive buy and sell prices for an NFT, and then engages in a peer-to-peer NFT transaction using a self-hosted wallet that is able to link to external websites, which most do, then, arguably, the websites providing the buy/sell prices and the self-hosted wallet will all have to collect the user's data and report the transaction on a Form 1099-DA. This will cause taxpayer confusion because they will receive numerous 1099-DAs, some of which will be duplicative and overlapping, which could lead to double taxation and reporting mismatches. This creates burden on the taxpayer to reconcile their returns and ensure their records with the IRS are accurate, but it also adds to the burden of the IRS to ensure tax compliance.

The proposed regulations also open the possibility of significant risk to the privacy and security of taxpayer PII, personally identifying information. In addition to name, address, and Social Security number, brokers are now required to collect, store and report the user's crypto wallet address to the government, which will enable both the information collector and the government to track the entire transaction history of that individual, regardless of whether other transactions in that history are required to be reported. And the definition of digital asset middleman is broad enough to deem multiple entities as brokers due to their direct or indirect involvement. So, taxpayers will now need to share that sensitive PII with multiple entities for the same transaction.

For NFTs, this is equivalent of wanting to sell a concert poster on Craigslist, but being required to share your name, your home address, Social Security number, and entire Venmo history with Craigslist, Venmo, and the IRS. This poses meaningful privacy and security risks, and building secure systems to collect and store the sensitive data requires substantial investment in maintenance. But many companies in the nascent NFT space are startups with limited resources to make such an investment. And as we've seen with the history of data breaches and hacks, even large institutions have challenges in protecting this type of sensitive information. And because there is no threshold for reporting this sensitive information has to be turned over, even for low-value consumer transactions.

Notably, from April 1 to October 1 of this year, the median NFT transaction value was $37. 09. Twenty-five percent of NFTs sold for less than $25; and 82 percent sold for less than $500. This means if these weren't NFT sales but Beanie Babies sales on eBay, many of these sales wouldn't be eligible to receive 99 (phonetic).

So what to do? We believe that narrowing the definition of digital asset to exclude NFTs that do not represent financial instruments and removal of the indirect service providers from the digital asset middleman definition in the proposed regs will enable taxpayers and the IRS to obtain the information they need for tax compliance and enforcement without needlessly subjecting taxpayer PII to security and privacy risks.

Because of their unique identifiers on NFTs, taxpayers are already able to trace them and their gains and losses with public blockchain data. Further, there are a number of software solutions out there already that are available for taxpayers to calculate their taxes based on this publicly available data. However, if a reporting regime is deemed necessary despite this publicly available information, one should be created or extended that is appropriate for NFT. A regime similar to 6050W, for example, which requires aggregate gross proceeds reporting above a threshold amount would be more appropriate to achieve the IRS enforcement needs for non-custodial platforms and NFTs that are not financial instruments.

So, to conclude, we appreciate you having OpenSea here today, and we appreciate being able to share our point of view with you, and we're available to answer any questions.

MODERATOR: Thank you. Does anyone on the panel? I do not. Anybody else have any? OK, thank you very much.

Our next speaker will be Shehan Chandrasekera, if I pronounced that correctly. From — I'm sorry, from CoinTracker. I apologize.

MR. CHANDRASEKERA: Hello, everyone. Good morning. My name is Shehan Chandrasekera, and I am the head of tax at CoinTracker. And, thank you for the opportunity to participate in this hearing today. In the next few minutes, I would like to give you a quick introduction to CoinTracker, a problem caused by these proposed regulations which will negatively impact brokers, taxpayers, and even the IRS, and a potential solution we have for that.

So, let me give you a quick introduction to CoinTracker first. We are the industry-leading digital asset transaction aggregator in the U.S. Our tool allows taxpayers to seamlessly connect their cryptocurrency exchanges and wallets, reconcile activity, and calculate capital gains and losses and ordinary income items. We have been in the business since 2017 and have produced over 1 million Form 8949s for U.S. taxpayers dealing with digital assets. As a company, we are deeply committed to helping taxpayers comply with digital asset taxes along with the upcoming information reporting regime.

So, speaking of regulations, first and foremost, we are pleased that the Treasury has provided clarity on digital asset broker reporting regulations. We think that information reporting is a powerful tool and it will drive compliance, especially for taxpayers who use a single broker or platform. However, if implemented as proposed, the broker regulations will likely generate a significant amount of incomplete and inaccurate data, ensure data gaps for all stakeholders in the chain. So, that includes brokers, the IRS, and taxpayers, and we are very concerned about this.

At a high level these data gaps, again, which affect everyone in the chain, are caused by the following three factors. Number one, digital asset transfers between custodial brokers and noncustodial brokers or unhosted wallets. I want to emphasize that this factor will create permanent data gaps in information reports as noncustodial brokers have no visibility into cost basis.

Number two, transactions not addressed by 1099-DAs, such as loans, wrapping, and et cetera.

Number three, the transition period brokers have to comply with regulations, which is from now until the regulations are implemented in the future.

So, these three factors will lead to significant data gaps in information reports for a number of years, as I mentioned earlier. So, let me give you a simple example to show how these data gaps, specifically related to transfers, create problems for all key stakeholders involved: taxpayers, brokers, and even the IRS.

Say I purchased one ether from a custodial broker for $1,000, transferred that coin to an unhosted wallet, and then connected my unhosted wallet to a noncustodial broker and disposed of the coin for $5,000. By the way, this is a very common scenario in the crypto space we see every day. So, in this case, as the taxpayer, I will receive a Form 1099-DA with just $5,000 worth of proceeds. It will not have a cost basis or data acquired, which is crucial for me to figure out my correct tax liability on Form 1040. In this situation, the average taxpayer will most likely file an inaccurate 8949 with ether missing and overstated or an understated cost basis. Overall, taxpayers will face a complicated and time-consuming tax filing experience, leading to a lower compliance.

The problems just don't end with taxpayers. Most brokers will have no option other than filing incomplete, inaccurate, and duplicative information reports. In fact, this is also highlighted by many other index stakeholders through Commence (phonetic).

Finally, the IRS will have to process a substantial amount of incomplete and inaccurate data submitted through both information reports and Form 8949s filed by the taxpayers.

Zooming into the taxpayer problem, this problem has lasted for a long time, and we are very familiar with this problem as a company, and taxpayers have used tools like CoinTracker to reconcile missing cost basis for a number of years. On a related note, you might think that the upcoming 6045 cafe regulations will solve the missing cost basis issue. Unfortunately, that will likely not be the case. Let me explain why.

Going back to our example, I transferred one ether from a custodial broker to my unhosted wallet. In this case, my coin just goes to an ethereum address. My unhosted wallet only controls the address, so it is not technologically feasible for the custodial brokers to determine whether the destination address is a broker or not and issue a transfer statement accordingly. So, brokers will continue to have gaps in the 1099 due to transfers. As a result, a traditional finance like broker-to-broker cost basis transfer system will only cover a small percentage of transfers happening in the digital asset space, i.e., only transfers between custodial brokers.

So, what's the solution we are proposing? Our solution relies on the following key principle. In the digital asset space, the true cost basis always lives with the taxpayer. Transaction aggregators like CoinTracker have access to this key source of truth data. So, we are asking the industry to leverage this crucial data aggregators have to supplement the gaps in information reporting. Of course, user consent, you know, will be required for this data sharing. Specifically, we have two recommendations.

Recommendation number one, we recommend that you promulgate rules, either by updating language under section 6045 or issuing separate guidance, so brokers can use data sourced from digital asset transaction aggregators when certain data points are missing from the internal records of the broker.

Recommendation number two, brokers who take reasonable measures to ensure the accuracy of this external data should be relieved from any accuracy-related penalties under section 6721 and section 6722 when producing information reports.

So, going back to my example, with this approach, the noncustodial broker will be able to know the cost, basis, and data acquired through my transaction aggregator software and issue a complete and accurate 1099-DA. So, to get a complete 1099-DA, the taxpayer could use any transaction aggregator who meets a certain common (phonetic) standard. This is not a CoinTracker-specific solution.

So, if you enhance the proposed information reporting with transaction aggregator data like this, we believe that it will increase digital asset tax compliance, it will decrease the burden on brokers and taxpayers, and the IRS will receive higher quality digital asset transaction data. All these benefits come from simply having complete and accurate data in the system, and we would love to work with the Service and the broader industry to make this happen.

I want to note that the solution we are proposing here is just a step towards a blockchain-based solution in the future. As crypto becomes more mainstream, we can see an opportunity to verify tax compliance at the wallet itself by issuing a service token to essentially mark wallets that have successfully remedied taxes related to digital asset transactions. Most importantly, we can do this by using zero-knowledge proofs and frameworks like ethereum attestation service, while also preserving the privacy of wallet holders, which is very, very important.

So, to recap, we believe that the traditional broker information reporting will work great for taxpayers who use a single custodial broker platform, which is a shrinking segment of the market. However, to effectively and efficiently increase tax compliance for multi-wallet exchange users, which is the majority of this phase, we strongly believe that your proposed information reporting regime must be enhanced by leveraging transaction aggregated data. As we pointed out earlier, this will lead to more complete and accurate information reports. If you do not rely on transaction aggregated data, all stakeholders in the chain, taxpayers, brokers, and even the IRS, will end up with a large quantity of incomplete, inaccurate, duplicative, and unactionable data.

We hope you take our comments into consideration when finalizing proposed regulations or issuing any future guidance. Thank you for your time.

PANELIST: OK, so I have a question. Really two questions. One is in your transaction aggregator system that you described, where in your hypothetical does — where do we get the basis information? Is it put into the aggregator by the custodial broker in your hypothetical, or is it put into the aggregator by the customer itself? That's my first question.

And my second question is, are you planning to submit written comments in addition to the outline that you've submitted today?

MR. CHANDRASEKERA: Yeah. So, right now taxpayers are connecting all the wallets and exchanges they have to CoinTracker, reconcile the activity, and produce the Form 8949 to be filed with the 1040. But after information reporting, taxpayers will also be able to notify about missing cost basis information from CoinTracker to their brokers so the broker can issue a more complete 1099-DA. That's what we are envisioning and we're having conversations with brokers on that.

To answer your second question, yes, we did formally submit our comment letter. It was submitted over the weekend. It hasn't been posted yet, so hopefully we will see it in the next week.

MODERATOR: We have one other question.

PANELIST: Public articles indicate that different aggregators can come up with different answers for the amount of gain or loss, which suggests that they are pulling different basis information. Do you have suggestions, if your proposal were adopted, do you have suggestions for ensuring that the information that brokers receive from different aggregators is consistent?

MR. CHANDRASEKERA: Yeah, great question. I think there's a couple of ways we can go about it. In the initial stages, brokers can do some type of internal test to make sure that the data that they're getting is reliable. In the long run, even IRS could consider introducing standards similar to how the IRS introduced standards to become a qualified e-file provider. So, those type of standards could be introduced in the aggregation industry. So everybody knows [the] same input results in the same output, and the outputs are consistent across all the aggregators.

MODERATOR: Anybody else have any questions? Thank you.

Our next speaker will be Jake Chervinsky from Blockchain Association.

MS. COPPEL: Hi, it's actually Marisa Coppel from Blockchain Association. I subbed myself in last week.

MODERATOR: Apologies, apologies. So sorry.

MS. COPPEL: No worries. Yeah, no worries at all. So, my name is Marisa Coppel. I'm senior counsel at the Blockchain Association. And I first want to thank you for including me on the agenda today and also for engaging with stakeholders on this very important issue. We plan to file our comment letter shortly after this hearing, and although I'm going to spend my time today discussing some of our most pressing issues, there are several others described in detail in our letter that I, unfortunately, will not have time to address here.

Our letter addresses issues related to centralized entities, some of which operate in a similar manner to traditional middlemen or intermediaries. They arguably fall within the definition of a broker. In our letter, we suggest several modifications to the proposal as applied to these entities, including increasing the time to comply, reducing the breadth and reporting requirements, and refraining from applying the regulations to NFTs and stablecoins.

But I would like to spend my time today discussing how this proposal impacts DeFi [descentralized finance] and noncustodial wallet software developers. I will first discuss how the proposal is over broad and exceeds Treasury statutory authority by pulling in participants who are not intermediaries or middlemen. I will then discuss why the proposal does not comport with APA [Administrative Procedure Act] requirements and would lead to constitutional rights violations.

This proposal sweeps in parties whose only means of compliance would be to abandon the decentralized technology that makes them unique. This construction will drive all U.S.-based decentralized projects abroad or out of existence, full stop. Compliance with this proposal would require centralization where none exists.

It is also wholly unclear as to whether certain participants have a reporting requirement at all. The language is vague, which would further make compliance impossible and will make it far more challenging for the IRS to achieve its goal of increasing compliance with tax reporting.

The proposal's definition of "broker" should be limited to centralized entities who can collect such information. This is what Congress intended when it initially set forth the clarified definition two years ago, and this is how the tax code's broker reporting rules have functioned historically. While the IIJA was under consideration, Congress proposed a broader formulation of the definition of "broker," which explicitly included any decentralized exchange or peer-to-peer marketplace, but Congress ultimately rejected that language.

Fast-forward to now. In this proposal, the IRS seems to have improperly read that language back into the definition of a broker by creating cascading expansive terms in a way that dramatically departs from the concept of a middleman and the rules applicable to traditional assets. In particular, the proposed regulations significantly expand the term "effect" and thereby revise the definition of "broker" beyond the statutory definition.

The proposal's definition of digital asset middleman, for instance, pulls in any person providing a facilitative service who would be in a position to know the identity of a party that makes the sale and the nature of the transaction. This includes those who provide a service that directly or indirectly effectuates a sale of digital assets.

The terms "indirectly" and "in a position to know" would likely include developers of both decentralized finance and noncustodial wallet software who are incapable of complying with the broker reporting rules. Both types of software merely allow users to either connect and transact with one another or with a smart contract itself. This software does not effectuate transactions like a broker, and developers of such software certainly do not have access to the information required for reporting. But this proposal fails to recognize the value of both decentralized and noncustodial software.

Decentralized technology eliminates the intermediary or the traditional middleman who necessarily carries risk. There is cybersecurity risks and data breach risks of holding so much sensitive data under one person's control. And there are risks centered around fraud and mismanagement. And when you look at transaction functionality, it's often slow, cumbersome, and inefficient, and expensive. DeFi, however, eliminates risks of failure under one point of control. It's more efficient and costs less for the user. Similarly, noncustodial wallet software enables users to hold custody of their assets themselves. These users are the only ones who have access to these assets, which reduces risk of abuse, fraud, or insecurity of middlemen. This proposal would destroy all of that value.

Given the impossible nature of compliance, these software developers will be forced to either shut down their projects, move outside the U.S., or so fundamentally change the nature of their project that it eliminates the benefits of decentralized and noncustodial technology entirely. Congress did not express an intent to destroy DeFi. These issues are so profound as to raise significant constitutional, APA, and statutory authority questions.

The APA requires a reviewing court to set aside agency action that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, contrary to constitutional right, in excess of statutory jurisdiction, or unsupported by substantial evidence. This proposal, if finalized, would fail each requirement.

When you look at the language of the proposal, it's clear that it goes far beyond what Congress intended in the IIJA, and there's no ambiguity in the term "brokers" that could authorize the sweeping approach that Treasury has taken. Given the impact on DeFi and noncustodial wallet software in the U.S., clear congressional authorization would be required before Treasury would have the authority to require such reporting.

Treasury has also not supported the proposal with substantial evidence or quantifies the costs or benefits as required by the APA. On the cost side, Treasury, one, vastly underestimates the cost of compliance by centralized parties and, two, fails to grapple altogether with the likelihood that the finalization of this proposal would force software developers to shut down their projects or move overseas. Nor does the proposal estimate the burden on Treasury to process billions of new filings.

On the benefit side, the proposal fails to quantify the supposed tax gap or the benefits that third-party reporting would bring in closing that gap. The proposal also treats digital and nondigital assets differently, without justification, which meets the test for arbitrary and capricious agency action.

Further, the vagueness problems also require that the proposal, if passed in current form, be set aside under the APA.

An agency's exercise of its statutory authority must be reasonable and reasonably explained. It's certainly not here. Even putting aside the serious statutory authority and APA concerns, the proposal also raises several constitutional concerns that would likely lead a court to invalidate it.

First, the definitions are unconstitutionally vague and fail to provide adequate notice in accordance with due process, since they leave many digital asset participants with no clear understanding of whether they are subject to the reporting requirements.

Second, the proposal raises serious privacy concerns that violate the Fourth Amendment. DeFi and noncustodial wallet software provides a way for users to transact in digital assets without having to divulge sensitive personal information to a centralized entity that could be vulnerable to security breaches and hacks.

Third, linking wallet addresses to personal identities would create a serious and permanent privacy issue, comparable to having a lifetime of credit card transactions published online.

Lastly, the proposal would compel developers to writing new code imposing content-based compelled speech. Because the proposal is not narrowly tailored, it is likely to be struck down as contrary to the First Amendment.

Given these issues, I urge Treasury to adopt in the finalized regulations a staged approach that first focuses on centralized trading platforms. Centralized trading platform reporting alone would achieve the IRS's goal of improved tax compliance, especially given that the vast majority of trading volume (inaudible).

OPERATOR: Excuse the interruption. You have one minute remaining.

MS. COPPEL: Thanks. After that, we recommend Treasury work with DeFi participants to find workable solutions that do not hinder the development of this technology that is already changing for the better the way our financial system functions. The U.S. prides itself on fostering innovation and also protecting civil liberties. We hope that you consider how this proposal can keep those American values intact rather than destroy them. Thank you very much.

PANELIST: Thank you. I have a question. I've asked this before, but I'd like to also ask you. Do you believe that the —

MS. COPPEL: Sure.

PANELIST: Do you believe it's administratively feasible for brokers to review each NFT transaction to determine which are financial in nature?

MS. COPPEL: Yes, I think so. I think we are aligned with Lawrence at Coinbase on that. I mean, I would first argue that the definition of broker just needs to be narrowed, but assuming that it applies only to centralized entities, I think that that would be possible. But I, you know, I would say that the centralized entities themselves are more of the expert on like how the tech would work to achieve that.

PANELIST: I thank you. We have — Yes, we have another question. You stated earlier that the regulations would require a decentralized finance or decentralized exchanges to abandon decentralization. Can you talk in more detail about why that is? Is it the diligence requirements? Is it the reporting requirements? Is it something else? All of the above. Something different?

MS. COPPEL: Yes for sure. And we definitely go into more detail in this in our letter, which we'll publish, or we'll file it shortly after this, but I'll give a few examples. So, one is there's obviously a ton of information that needs to be collected in order to do this reporting. And if there's no specific person that is like either owns or controls the software that users are using in DeFi, there's no way to collect that information. And then even if there was a way to collect that information, how would that information be stored? So, it raises some security concerns given that, like the information is sensitive personal information, and there wouldn't be any way to actually organize, like how who would be responsible for collecting it and then how they would actually store it or fill out the required forms.

And then another example, and this one more so applies to the non-custodial wallet software providers. So, the software allows a user to hold custody of their own assets. And they're the only ones that have access to their assets. So, it would be impossible for the software developer to, like, reach into a customer's wallet and do, for example, backup withholding.

And then also related to both of them, there would be no way for these developers to gather the information as to which transactions are happening, when you know where they're being, what, where the digital assets are being sent, or who sent them. It would just be impossible to collect that because they don't have a means of like storing that information and then being able to access it.

PANELIST: You know, I have one other question. I guess you are agreeing that a custodial brokers would be covered. I guess I have a question whether your custodial broker members would prefer reporting on NFTs. Let's say that there are non-financial NFTs under a different regime, say like a 6050W when they are also reporting the pay for transaction under 645? Are you saying that your members would prefer the two separate recordings? Right. The NFT dispositions under one section, but the pay for dispositions under this section? Or is that something — Yes.

MS. COPPEL: Yeah, I would have to look at the sections and talk to our members before I express a position as to what our members would prefer, but I'm happy to do that if that would be helpful.

PANELIST: Yes. That would be very helpful. Thank you.

MS. COPPEL: Yeah.

MODERATOR: Anybody else have any questions? No. OK The next speaker will be Lindsay Carpenter from the National Taxpayers Union Foundation.

MS. CARPENTER: Thank you so much. Good morning, everybody. My name is Lindsey Carpenter and I'm an attorney with National Taxpayers Union Foundation. I would just like to start off by thanking everyone for not only hosting this commentary period, but allowing us to participate in the legislative process. We at National Taxpayers Union Foundation has have been a leader in developing responsible tax administration for nearly five decades, and cryptocurrency is no exception. We strive to offer practical, actual recommendations about how our tax system should function and really lend research and other assets that are really helpful in developing tax administration that only not only helps the taxpayers, but also is functional for the IRS.

So, from that, turning to this IRS cryptocurrency and digital asset proposed regulation, we believe that really the overarching underlying tone of this proposed regulation is the reason that it's not really practical to be applied right now or will not function in the way the IRS intended. And that really lies on the basis that the IRS in this, in this proposed regulation, is attempting to treat cryptocurrency almost exactly the same, more or less, with the traditional financial market.

And it's really happening in a very rushed manner as well. What needs to happen at the outset is that the IRS and the Department of Treasury needs to get together a group of people who are experts in cryptocurrency and experts in the traditional financial market, and from there, have a sandboxing session from which they can propose regulations which are helpful to taxpayers, helpful to the IRS, and does not harm the growth of the cryptocurrency industry.

So, just as a brief back history. The cryptocurrency differs from the traditional financial market in that it's multifunctional. The traditional financial market, you have stocks and you have those other assets which are traded on the New York Stock Exchange. But cryptocurrency can be treated as cash, can be treated as stock, and can be treated as other financial assets, not just stock. Not only that, but cryptocurrency is instantly traded through the internet.

There is no time that the trading stock market, if you were to call [it] that, were to shut down. Cryptocurrency is global in nature. It's not dependent per se on a state-specific, country-specific trading platform or dollar value. And the means of trading differs significantly from that of the traditional financial market, just because that is essentially on the internet. In other words, cryptocurrency is the next step in evolution of the financial system.

And until 2009, the world really hasn't seen a financial asset institution such as cryptocurrency. And because of that matter, there needs to be regulations which specifically recognize that cryptocurrency, although it is, yes, an asset of a financial system, it's the next step. It's the next evolution. So we need proposed regulations which acknowledge this and also have functionality to be applied to this purely internet next-step evolution of cryptocurrency.

These regulations simply aren't it. In these regulations there's multiple attempts to apply traditional market notions to this digital-asset-transaction, cryptocurrency market that's occurring. In other words, it's akin to trying to fit a square peg into a round hole.

What's needed is specific cryptocurrency regulations and not just regulations as tax regulations, but there needs to be some level of regulations on the crypto market itself before a tax is applied. That's one significant characteristic of what the IRS is attempting to do here with tax administration versus the traditional financial market, in the traditional financial market.

There was some regulation of the market itself to ensure protection of taxpayers, to ensure protection of businesses and investors from any amount of fraud or proxy schemes before taxation was implemented. Likewise, there needs to be something similar with the cryptocurrency market. So regulation when I'm stating, that is, not just encompass taxation policy, but also encompasses pure policy for the cryptocurrency regulation. That being said, we at NTUF agree with the IRS and the Department of Treasury that there does need to be some taxation regulation with the cryptocurrency market and general regulation as a whole.

But these proposed regulations simply are not it because, simply stated, these regulations are premature. First and foremost, there needs to be a regulatory scheme for the cryptocurrency industry so that investors' platform, cryptocurrency platforms, and business investors as well aren't confused and bogged down by various litigation schemes that are both state specific, national-specific and international-specific.

Once we're able to secure a standardized level of regulation for the cryptocurrency industry, then it would be more applicable and beneficial to the IRS and Department of Treasury to apply a tax regulation scheme. Simplifying [a] regulation scheme at this level wouldn't function the way that that is intended to function, simply because there is no set regulation. These, the current cryptocurrency platforms are having try to juggle the differences between international, state and domestic regulations, while also introducing these regulations would be too burdensome on the emerging cryptocurrency sector.

And that's, that also leads into my second point and critique of these regulations is that both the cryptocurrency infrastructure and the IRS's own infrastructure is not ready for what's going to happen if these proposed regulations would be enacted, as they are simply stated, the current cryptocurrency infrastructure, although they would be able to acclimate to these regulations, giving only one year to do so is not reasonable or fair to ask. It's going to take an extended period of time for the cryptocurrency infrastructure to consult with their attorneys, consult with their CPAs, and consult with their investors, try to figure out what is the most applicable way to abide by these regulations, and build that infrastructure into their current platforms, build that structure into the cryptocurrency. Asking for this to be implemented by 2025 is simply not feasible. Moreover, the IRS's own infrastructure is not ready for what will happen if these regulations are to be implemented. Currently, as of November 4 of this year, the IRS has 1 million unprocessed IRS returns, and that is before the implementation of these policies, which, according to one IRS director, is expected to increase to almost double what is being seen right now.

Matter of fact, the IRS director furthered that the IRS technology, the way it is today, will not support the data and volume that will come out of these proposals out of proposed regulations dealing with digital assets. In other words, in order for the IRS to really be able to benefit from a taxation of the cryptocurrency and for the cryptocurrency industry to be able to comply with the IRS, there needs to be more time for both sides.

The IRS needs time to build up its infrastructure to reboot its computers and technology system, to be able to process not only more tax returns, but also to step into the digital asset cryptocurrency future market, but also the cryptocurrency industry needs time to be able to build up the infrastructure to abide with these regulations.

Third, as well is that with the current growth of the cryptocurrency market, which we are seeing an unprecedented expansion of not only job opportunities and money and investors flowing through this financial sector, but implementing these regulations as a whole would greatly slow down the cryptocurrency market, because, again, these regulations try to apply the traditional financial market ideology towards cryptocurrency.

And although there are some similarities, to a certain extent, there needs to be regulations that recognize the digital aspect of cryptocurrency, the faster facet of cryptocurrency, and make regulations that apply specifically to cryptocurrency characteristics instead of just trying to apply a traditional financial market ideology. Our third critique is, our second critique, pardon me, is that these proposed regulations, as they are, they harm taxpayers.

I think we've heard from all the speakers today, is that the regulations are overly broad, somewhat overly broad, means in exchanges that the taxpayers likely will suffer either double taxation or over-taxation if these regulations are implemented as possible. One sector that we were particularly concerned with is that is the aspect of only allowing of taxing asset-to-asset transfer, transfer taxation within the cryptocurrency market.

And that's first and foremost because [the] cryptocurrency market, because it's not regulated as a whole, is extremely volatile and open to Ponzi schemes. We've seen this over the past 10 years. What this means is that taxpayers are suffering massive losses, which they may not suffer inside of a traditional stock market exchange, just because of the regulations that are in place, for instance, with the New York stock market to stop any Ponzi schemes, that aren't in place with the cryptocurrency market.

So under this current taxation scheme is that if you're if under the regulations, you're going to tax the value gained from one digital asset, such as an ether exchange for another digital asset of bitcoin, or vice versa, is that hypothetically, in such a scenario, if there is a massive loss for one crypto asset exchange for another crypto asset, that's a Ponzi scheme — well then these investors could be facing millions of dollars of losses.

Oftentimes under the current IRS scheme, investors are only allowed a $30,000 deduction per year. This could perpetually set taxpayers into only being allowed to deduct what is a massive lawsuit of a Ponzi scheme a little fraction of each year, perhaps for the rest of their lifetime. What this means is that there needs to be a lot more protection for taxpayers in a market. That's —

OPERATOR: Excuse the interruption. You have one more minute remaining. Thank you.

MS. CARPENTER: — volatile. So, all in all, the purpose of this is that the current regulations, as they are, they're going to increase litigation risk. They're vague and ambiguous. The other portions of the regulation as well really tend to cabin what is an emerging industry, as a traditional stock. Because of that, we need to focus on sandboxing a group of experts to make regulations that are beneficial to all of the parties involved. We thank you for allowing us to be a part of this process, and are here to help with any recommendations.

MODERATOR: Thank you does anybody on the panel have any questions? No. OK. The next speaker will be Ryan Leverett.

MR. LEVERETT: Hello? Can you guys hear me?

MODERATOR: Yes, we sure can. Thank you.

MR. LEVERETT: Hi. So first of all, I feel maybe a little bit out of place as a — testifying here because I'm really just a taxpayer and also a tax preparer at a small tax firm. But I want to thank you for the opportunity to testify today. So as I said, my name is Ryan Leverett. I work as a tax preparer.

We primarily deal with individual and small business taxpayers. So, my comment is primarily focused on how this the proposed rulemaking would affect the average taxpayer. So first, I'm requesting that the 1099 digital asset form that's created — I'm requesting that it would have a similar look and similar information that's provided as the existing 1099-B. This would make it easier for taxpayers to determine their actual taxable gain from the sale of digital assets, and it would make it easier for tax preparers upon the implementation of this form.

I'm also asking that this proposed rulemaking regulation continue forward, as the rules will ensure that brokers and other stakeholders will be forced to become more secure and better regulated. As it stands now, the crypto space has seen too many instances of dishonest or shady companies, most famously FTX, that have taken advantage of the loose regulations around the space to con their clients and investors out of their money and digital assets.

This proposed rulemaking would be a good step in the direction of reining in the Wild West of digital assets, as it exists now. Digital assets are defined primarily as digital assets securities, or I should say, digital assets that are securities are defined by the Securities and Exchange Commission as a digital asset security and as such are, I think, should be regulated in the same manner as a traditional security, and therefore the tax treatment and reporting requirements should be in line with that of a traditional security.

I'm also asking that the IRS and Treasury Department continue forward with their proposals to expand requirements for reporting, particularly with respect to the proposed expansion of reporting requirements as a tax preparer. The required reporting of basis and sale price of digital assets would make tracking, tracking the taxability of a transaction, much easier for the average taxpayer, as it would ensure that taxpayers and those who prepare their tax returns are aware of the cost and sale price at every potential taxable transaction.

Too often, we receive inaccurate or incomplete information from taxpayers, as taxpayers are unaware of their basis in a digital asset, or they are unaware that a transaction was a taxable event and therefore failed to report that a transaction occurred. Once again, thank you for letting me testify. I yield the rest of my time.

MODERATOR: Thank you. Do we have any questions? Yes, we have one.

PANELIST: Thank you. Do you plan to submit a written comment?

MR. LEVERETT: I am happy to submit what I wrote out as a written comment. Yes.

MODERATOR: Thank you.

MR. LEVERETT: Yes.

MODERATOR: Anybody else have any questions? OK. Our next speaker will be Carlo D'Angelo from DeFi Defense Law.

MR. D'ANGELO: Yes. Good morning and thank you for giving me the opportunity to speak on this very important proposed digital asset broker regulation. By introduction, my name is Carlo D'Angelo and I am a criminal defense attorney, former law professor, and an advocate and user of blockchain technologies. My law practice focuses on areas of digital asset crime, as well as KYC [know your customer] and AML [anti-money laundry] compliance in the crypto sector.

I'm here today because as a lawyer, deeply involved in the digital asset sector, I have serious concerns regarding the IRS/Treasury's proposed reporting requirements as currently drafted. These proposed regulations require consumers to disclose sensitive personal identifying information to any qualifying digital asset broker in order to effectuate digital asset transactions.

These digital asset brokers, who fall outside the scope of traditionally regulated securities brokers, would then be required to collect, store and pass on that KYC, know your customer information to the IRS in the form of a special 1099-DA reporting form. It is my humble belief that, if approved in its current form, these proposed asset reporting requirements significantly burden growth and innovation in the digital asset sector and expose consumers to very serious data privacy risks.

Stated simply, these proposed regulations pose an existential threat to the future of crypto and DeFi in the United States. Although these proposed IRS/Treasury regulations seek to enhance tax compliance in the United States digital asset sector, it is my humble belief that they do so at the expense of personal taxpayer  user data and privacy.

These regulations impose an unprecedented and frankly, what I believe to be an unworkable asset reporting regime on both consumers and qualifying brokers, that goes far beyond any regulatory framework ever proposed to date. The government's concerns regarding tax reporting compliance in the crypto sector are very similar to those previously raised with respect to the reporting of qualifying cash transactions.

If, however, the United States were to impose analogous reporting regulations on cash as proposed in these regulations for digital assets, then every qualifying retail cash broker, quote unquote, would be required to collect sensitive consumer privacy information for every cash transaction, regardless of the amount of that cash exchanged. Because as we know from reading these regulations, it applies to all digital asset transactions, regardless of the cost basis that that apply to the definitions stated in the proposed regulations.

This would create an overly expansive and unmanageable surveillance mechanism for consumer cash transactions, in the analogy that I'm providing, burdening both consumers and the retail sector. Imposing this type of reporting regime on the digital asset sector creates identical concerns regarding privacy data, and puts such information in the hands of non-traditional brokers who are not yet equipped to manage the collection and storage of such highly sensitive information, especially when we're considering the DeFi and the decentralized aspect of qualifying digital asset brokers.

While I understand the government has a substantial and justifiable interest in creating an accurate digital asset data tax reporting regulatory system, the current proposed regulatory solution does so at the expense of jeopardizing consumer data. The problem with the current proposed solution is that it attempts to apply traditional 1099 reporting solutions to a new and technologically innovative, non-traditional asset class.

Rather than turning to traditional 1099 reporting options, I would submit that the blockchain itself offers a viable and workable solution that can vastly mitigate these privacy concerns. I'm currently working to build a protocol to assist digital asset brokers in compliance with these proposed regulations once they go into effect, and I believe that a component of this compliance measure will be something along the lines of a zero-knowledge proof identity verification technology. Such a system would verify KYC information from users without revealing the actual data to the digital asset brokers. That would preserve user privacy. In such a scenario where the blockchain is utilized to verify identity as opposed to completing this 1099 proposed form, a unique zero-knowledge identity token could be generated for each consumer.

That token could confirm the consumer's identity and verify compliance with data reporting requirements without exposing the sensitive data to the digital asset broker platform. The consumer in that scenario could simply share their unique identity token with the digital asset broker at the time of the transaction. The digital asset broker would only capture the consumer identity token users identification number and not the underlying privacy data.

The digital asset broker would then share that privacy token ID with the IRS on a Form 1099, which is specially crafted for purposes of that particular identity token, instead of transmitting the consumer's sensitive data as the counterparty to this privacy token protocol. The IRS would have exclusive access to the consumer's encrypted user information in order to verify the identity of the consumer and their token ID on that 1099 form, without having to expose that information to any potential third-party data breach.

This framework ensures accurate tax reporting, as the IRS being the sole authorized entity to access the encrypted underlying KYC data from the zero-knowledge proof provider, can use that unique token ID for identity confirmation and tax compliance purposes.

Such a system would also eliminate the danger of consumers providing such sensitive information to illicit actors, or to legitimate digital asset brokers, who may lack sufficient means to store and manage such data. I believe that this innovative approach not only aligns with the regulatory intent of ensuring tax compliance, but also significantly mitigates the privacy and data security risks for individuals involved in digital asset transactions.

This proposed sort of a solution would present a balanced pathway fostering a privacy-centric environment, which would, I think, fulfill the decentralized ethos of cryptocurrency and blockchain technology while also fulfilling tax reporting obligations, thus promoting a robust and sustainable digital asset ecosystem in the United States. I'm keenly interested in sharing more details about such proposed solutions, and having a constructive dialogue with Treasury regarding how to bring compliance into this new and innovative technological asset trading regime, and I welcome the opportunity to share further thoughts and answer any questions that you have. I humbly thank you for the time to speak here today, and I would yield the rest of my time.

MODERATOR: Thank you. I have one question about your innovative approach, your proposed innovative approach. Could you explain how the customer would get the payee statement? I understand that the broker would send the token ID number to the IRS, and presumably the IRS would have some key to use that ID number to know who the person is. But how would the customer actually get their statement?

MR. D'ANGELO: I think there would need to be some kind of a hybrid approach to this because as is normally the case with tax reporting, it is a self-reporting requirement. So I think the taxpayer themselves would have to through a crypto Ponzi tracking program have to monitor their purchases and have to make sure that their purchases in the end reconcile with what is being recorded by the digital asset broker via the 1099 form.

I think what potentially is a problem with the way this is currently structured and I understand the Treasury obviously is trying to adapt to this law that was passed in the 21 'jobs and infrastructure act, and trying the best they can to implement it — but I think the concern is if you have a pile of 1099 digital asset recording forms from the broker, IRS generally can't do much with that until the taxpayer actually makes their tax payment.

And then as I understand it they would have to reconcile those two documents. So I think this might allow a double review whereas traditionally speaking the taxpayer would pay, would file their return and then if their return does not match up with what has been provided by the asset broker, I think that's what would trigger further inquiry.

MODERATOR: Yes, so there are a couple of questions. One is, can you give us a sense of how close to real-world implementation the identity token you've described is, or similar privacy tokens that we understand others are working on? And the other question is would you envision that the use of the privacy token be something that a customer would use voluntarily or would you envision this being required in some way?

MR. D'ANGELO: I think there could be a couple of approaches to it. The IRS already has a very robust identity verification system in place when it comes to processing tax payments via their on line portal. I think what it would take is a willingness to think outside of traditional forms of technology when it comes to verification and consider working with blockchain technology providers. To answer the other part of your question, I've been in contact with several zero-knowledge proof providers. Some are very far along, including something that Coinbase has recently launched through their platform base which provides a component of identity verification.

So I think the technology is very close. What's always been a hindrance is the computational power that it requires to create these zero-knowledge proofs, but as we are starting to see more lean and cost-effective Layer 2 solutions such as what Coinbase is providing with their base token, I think we're going to see accelerated growth and expansion of this as a means of enhancing identification via blockchain technology.

MODERATOR: OK, anybody else? Any questions, No? Oh, yes!

PANELIST: Do you have any concerns that taxpayers might find it burdensome to monitor their own transaction?

MR. D'ANGELO: I think as someone who could well speak in this case, I think those concerns already respectfully exist because as it stands right now given the current recording regime that we're under, the taxpayer is required to identify whether they transacted in any digital asset transactions in the tax year on their tax form. Then they are required to have to go in and look at each of their transactions and reconcile them. So I think that burden already to an extent largely exists. I think what this regulation is trying to accomplish at its core is to make sure that there is consistent recording across all digital asset traders.

I think it does add another layer of burden, but I think considering the burden that individuals are currently experiencing in trying to keep track of their digital asset reporting and tax compliance, I think this might ultimately prove to be an enhancement mechanism through zero-knowledge proofs to try and bridge that gap while also preserving the decentralized nature and the DeFi protocols that a lot of the previous speakers have advocated for.

MODERATOR: Anyone else? OK, thank you. The next speaker will be Tavarus Blackmon, Tavarus Blackmon Art.

MR. BLACKMON: Gents, everybody, dear members of the Office of the Treasury, thank you for accepting our request to offer public comment regarding the rule making regulation 122793-19, where a use case aka in every person or more simply a small business, I will be speaking on behalf of Tavarus Blackmon Art LLP, a partnership with my wife, E.J. Cord, a micro-small organization with a subsidiary, Blackmonster Music, which is a production company, website desktop publish manuscript, audio archive, and pending U.S. patent and trademark registration.

I am also speaking on behalf of the interests of the entity's creative foundations and art products and services organization and pending U.S. patent and trademark registration and Art Musical Space, a web-based virtual gallery, artist archive and fine art e-commerce solution. And Art Space is also the brokerage to the art consultants of the U.C. Davis health art collection having placed several diverse artists into their art school. I am also an educator in the CSU system at CSU Sacramento, or Sac State.

My position is lecturer within the art department. I am under a renewal annual contract. I work with undergraduate art majors and non art majors from vast disciplines and colleges from within the university, and instruct beginning drawing, intermediate drawing, and digital art.

Having earned an MA and BA from CSU's system in studio art I went forth to earn a second master's degree, internal A from the R1 U.C. Davis. U.C. Davis ranks among the top 10 public colleges in the country, top five agricultural programs in the country, and top 15 art programs across the country. I was named charter member of the U.C. Davis art and art history department board and am a member of the department's advisory board of directors.

I am also the Diversity, Equity, and Inclusion Committee Chair at Root Division, a wage-certified non-profit org art center and exhibition, San Francisco. I am also on the Curatorial Committee and an advisory member working between Bay Area and greater Northern California regions. In 2022 and '24 I was a volunteer nominated with the Access MoMA and SECA Award. 

Finally, I'm a paid volunteer and organizational vendor with the city of Sacramento, have worked as a consultant to the city and Sound Music Cities as music census for the city of Sacramento, the Guaranteed Basic Income for Artists Grant administered by the city of Sacramento, and the National Endowment for the Arts, and a volunteer to the panelists with the California Art Council which grants nonprofit organizations and creative development grants.

Further, I've been a recipient of the UCLA Graduate Diversity Fellowship which I did not accept; the U.C. Davis Provo Scholarship, the Friedman Gadbury Award, the Friedman Nelson Award in Painting, the Headlands Center for the Arts Graduate Fellowship; the Kala Art Institute Paint and Arts Award administered by the Sustainable Art Foundation, the Kala Art Institute Artists in Residence; the Caldera Center for the Art Artists in Residence; the Curatorial Fellowship at Root Division; and between 2020 and current, we have been the recipient of grants from the city of Sacramento, the California Arts Council, the Sacramento Office of Art and Culture, and the Sacramento Office of Economic Development Innovation.

Finally, we have had the honor to judge for the Golden 1 Center; the California State Fair, painting and drawing category; the city of Lathrop Mayor's Art Show, and recently had our work exhibited in Mayor Steinberg's Art Gallery.

We have been outspoken in regards to the development of policy and rule making, Tavarus Blackmon Art, LLP provided public comment to the Treasury, IRS, USCL, and USPTL, and the responsible development of digital assets. Recently we provided public comments on the AI in regard to President Biden's executive order on AI, Governor Newsome's executive order on AI, and regarding crypto, this reg 122793-19 which, you know, we're grateful to be able to present our position in Web3, specifically regarding this reg and potential rulemaking.

We can neither parcel all the transactions nor manipulate our data. We do not employ legal counsel. We do not employ development or marketing teams. My wife makes the meals, feeds our children, takes care of the house, and I'm kind of left to my devices to play and disrupt formally and critically the fields of art and technology, now Web3 development with the support of my family.

The result is we have a vast eco systems spanning Web2 platforms, Web3 assets, IRL fine art, and managing the archives of digital files and caretaker of our art collection. And specifically with regard to this reg, there are but a few points which we would like to make which are the following:

Web3 and the U.S. 's response to Web3 technological development have thrust our culture and economy forward into the unknown while having experiential position of an infrastructure that is deep, rich, and composable yet without the underlying framework of policy to facilitate the small business's successful entrance into what has been called the future of the internet.

In addition to this, which is not exactly failing, for example, you know, we are excited to be at the cutting edge and the tip of this new economy and technology, but it has not been a communal pleasure trip. It has been a cutthroat process of having our unique tokens viewable and our data accessible, cross-chain and in cross-platforms.

The current proposal much in the nature of Web3 is rich and deep. Unlike Web3, however, the reg does not have a composable component once passed as law. And our inability to fully consume the information on the reg leads us deprived. We would like to respond in a way that moves discussion and policy forward, helps to secure the blockchain for all participants and expressly uphold the tentative decentralization and permission-less nets.

OK, as far as the broker definition, we do not fully understand the definition as it is described. We can only state that and work as an IRL fine art broker and virtual gallery owner. We facilitate and will trade and transact with our own collectibles and digital assets to our own entities and third parties. If we are asked to file and provide information as a broker our aid to sell and disposition of crypto to a third party, we will provide required information on the collector to the IRS.

We will not conduct business with anonymous collectors. We support Web3 in all of its endeavors and believe in security for participants. However, as we are a nominal public figure and professional artists, we must request transparency from collectors and holders regarding the legal collection of data during the disposition of our digital assets.

We don't necessarily agree with previous statements by the USCL and USPTL regarding digital assets. Digital assets are real tangible objects. Further, the convertible nature of the digital files makes them not only tangible, but also a physical representation, but value phase change. The add-on and value is a very novel economic device and further walk-through mechanics make future phase change part of the contract and metadata.

For this reason a close and intimate look at digital assets on the blockchain is merited. We do not feel we have had enough time to process a proposed definition, and in light of accessibility and inclusivity please consider restating the definition in a way that can be read naturally. Thank you for your consideration on that matter.

The reporting regulations for brokers, I just want to state that, you know, our income in 2022 was only $140,000. You know I had to work super hard day in and day out around the clock to do that. The broker definition in the proposal certainly is robust. We can only respond by asking, you know, if a broker does not know they are a broker are they still a broker? And with what diagnostic could that be determined? I read the definition of policy and I am still unsure with regards to my organization specifically.

To simply state one should seek legal advice, it bars them from equity. And I'm sure that instead of simply seeking advice where it might be needed, the resource or support could be provided.

Please reconsider methods of advancing this technology by making the rule making process more accessible to members of the wider crypto and burgeoning crypto community. For example, as an educator, my students are not engaging with the city or national concerns especially this policy topic. Please develop methods to make reg and rulemaking a process of inclusion and not simply a delineation of cross-reference entries. Thank you for your consideration on that topic.

Establishing the 1099-DA, thank you to the fellow panelists who have provided comments on this. Like I said I'm not an attorney, I'm a fine artist and business owner. In the normal operation of my organization which is to mine or mint entity tokens, we've used Turbo Tax, ZenLedger, TaxBit, TokenTax, Crypto Tax Calculator, CoinTracker and Koinly; however, we were not provided accurate or real time data for our collection and transaction.

OPERATOR: Excuse the interruption; you have one more minute remaining.

MR. BLACKMON: In regards to this, it's been difficult to successfully reconcile our tax liability. As a stakeholder with the DFPI, they referred us to the Sacramento Small Business Development Center who could not provide an update or resource on how to file. We were referred to the IRS and the miscellaneous unit that was not able to provide our organization with support. Our comment is public. It has been published. You can look at that on the regulation.gov website.

I have a few more points here that I did want to mention, especially the EOA minting laws and our position is not clearly defined as yet by the proposal. But determination in point of taxation we feel is we are not dominion and holder of the ethereum that we secured on the blockchain; however, only the entity token that we cannot actually pay tax before we've been paid ourselves.

As far as the topic of —

MODERATOR: OK, thank you.

MR. BLACKMON: Hello?

MODERATOR: Yeah, hold on. Does anybody have any questions? I apologize, that was the ending of your 10 minutes. I appreciate your participation. The next speaker will be Rory Rawlings, Blu Canary Capital. Mr. Rawlings, are you there? Operator, are you there?

MR. RAWLINGS: You're not hearing me? Can you hear me?

MODERATOR: Yes, is this Mr. Rawlings?

MR. RAWLINGS: Yes, I'm sorry; I was having a problem with my connection.

MODERATOR: No worries, we can hear you now. You may begin now, thank you.

MR. RAWLINGS: Very good. Good morning. I appreciate the opportunity to provide public comments on this very important issue. Today is déjà vu for me.

In 2006 I was invited to testify before a congressional hearing on a similar issue, the difficulty of complying with the tax, at the time sales tax for e-commerce. A growing amount of business activity was moving from Main Street to the internet and it was largely untaxed. It was the early days of what we now call Web 2 and the discussion centered on indirect taxation.

In contrast today we see business activity shifting to a new financial infrastructure called Web3 or blockchain. The matter at hand is the direct taxation of digital assets.

I am a serial entrepreneur having co-founded Avalera, the leader in automated indirect taxation that recently went private from the New York Stock Exchange. My latest venture is Blu Canary Capital, a venture studio. We start new companies and acquire early-stage companies to put them on a growth trajectory with our team of seasoned executives. We recently acquired Fyn, a relatively unknown Web3 tax company for one very specific reason, the Sim tax engine. It has global scale. It was designed and tuned for Web3 basis determination at the extreme scale of modern exchanges in high-frequency trading.

Most of the comments I have heard, excuse me, most of the comments I have read or heard today relate to the difficulty and complexity of determining and reporting the tax basis for digital assets. It is a uniquely challenging area of tax in a decentralized ecosystem that calls for a unique solution, but we confronted an issue of similar complexity in 2006.

Obviously, e-commerce taxation has been solved even though it was once considered intractable thanks in part to a company I founded in 1999. Today tax collection for internet fails as ubiquitous. It is not controversial. Some of the lessons from that era can be applied to this situation as well.

The origin of that solution was the Streamline Sales Tax or SST initiative that began in March 2000. SST had three original tenets that apply to Web3 taxation today. These three tenets will resolve the majority of the complaints concerning these new regulations.

No. 1: All tax determination, reporting, and returns were done by a third-party certified tax service called a certified service provider or CSP.

No. 2: The CSP systems were audited for accuracy before being certified thereby eliminating the need for post transaction audits while at the same time eliminating tax determination and reporting mistakes.

No. 3: Due to the outside cost burden on some businesses and the additional revenue collected by the taxing authority, said taxing authority should pay the service provider directly eliminating the cost in labor burden of complying with the exceptionally difficult tax.

I recommend the IRS create a small commission with both IRS and industry participants tasked with defining, the creation, and management of certified tax service providers following the three tenets above that satisfies both government and industry. I think everyone on this call and everyone involved with digital asset taxation agree that it is difficult to understand, let alone comply.

There are problems including among other things over reporting and basis determination. Quite a few well-respected institutions are calling for a delay so the industry can compile a rational response everyone can live with. No one wants to be non-compliant. No one wants to stifle innovation, but we don't need to accept tax avoidance in the Web3 world, either.

Technical solutions such as Fyn already exist and can be certified as accurate by IRS auditors. As with inter-jurisdictional internet taxation in the early 2000s, digital asset basis determination is a complex problem requiring direct IRS intervention by providing third-party determination and reporting at no cost to the broker in the middle.

As I did with complex issues surrounding internet taxation in the early 2000s, I will make myself available to further the cause of tax compliance without creating an undue burden on those who have to comply. Thank you.

MODERATOR: Do you have any questions?

PANELIST: Do you plan to submit a written comment and also is there a resource that you can suggest that we could look at to understand how the system you described worked?

MR. RAWLINGS: I will definitely provide my comments. And sure, I can certainly point you in the direction of some resources.

MODERATOR: Thank you. Anything else? OK, the next speaker will be Sean McElroy from Fenwick & West.

MR. MCELROY: Thank you. I'm Sean McElroy, a tax attorney at Fenwick & West, and I'm speaking today with Kevin Kirby, a regulatory attorney at Fenwick & West. Together with the Fenwick blockchain team, we've advised hundreds of clients on tax and regulatory issues relating to blockchain technology. We're thankful for the opportunity to discuss proposed broker regulations, and we hope to offer what we think are productive comments and potentially helpful solutions. First, we want to say that we empathize with the tasks the Treasury and the IRS have here. The IRS itself has said these regulations will more than double the number [of] 1099s to be filed, and we understand the major tax compliance issues that are at stake here.

But we fear that [the] proposed regulations are, on the whole, a lose-lose proposition. In our view, many portions of proposed regulations will not promote tax reporting and compliance and instead will impose undue and in many cases impossible burdens on enterprises using an emergent technology that holds immense promise for Americans and for people around the world. To that end, we encourage Treasury and the IRS to proceed carefully and intentionally in implementing broker reporting requirements and applying them to virtual currency transactions. Before turning it over to my colleague Kevin Kirby, I want to highlight just a few of the key points that we have raised in our written comment letter, which was submitted over the weekend.

First, we recommend the proposed regulations reconsider the extraordinarily broad definition of broker. This definition goes far beyond any reasonable interpretation of what a broker is. In doing so, we also want to note that there is not a-one-size-fits all solution to the problem of cryptocurrency reporting. Different solutions and different regulations are likely needed for, say, centralized exchanges and decentralized exchanges.

We thus recommend that any final regulations limit the definition of broker to entities which directly effectuate transactions. The entity that Congress sought to bring into parity with existing financial reporting entities, indirect providers of services, cannot, by any reasonable interpretation of that term, be said to effectuate transactions.

Second, we recommend that the final regulations embrace a principle of technology neutrality. This is a principle that Treasury and the IRS have embraced with the emergence of the internet over the past half-century.

As many others have said today, we believe that rules applicable to brokers of blockchain assets should be at parity with existing rules for current financial services providers. We do not wish to create any favorable regime for cryptocurrency, but we also don't believe it should be a disfavorable regime for cryptocurrency transactions.

Third, we recommend that the proposed regulations be redrafted to better consider the nature of decentralized finance. This is particularly important given the impossibility of implementing a centralized broker regime to decentralized financial transactions. DeFi applications allow users to interact directly with counterparties in many instances. We urge Treasury to take the time to investigate the best way and to study how we can efficiently obtain the necessary tax reporting information, but not imposing an impossible-to-meet burden that would destroy DeFi application.

This is not a solution that is accomplished well by forcing 20th century broker reporting rules to implement an industrywide by entities who are not brokers. We also recommend that developers of DeFi applications, those writing the software, should be expressly excluded from being digital asset middlemen under the regulation. There is no sense in which merely writing software could be said to effect transactions merely by creating a new technology.

Finally, as discussed in our letter, we believe that there are potential solutions, such as a blockchain based tax ID number, that could be privately associated [with] transactions that would provide a blockchain based-solution to tax reporting. And we believe that Treasury should take the time to really understand how it can use this technology and incorporate blockchain technology in its own systems to better serve the American public and create a reporting regime that works with the nature of the transaction.

And fourth, even for brokers in cryptocurrency assets under a narrow definition, we still believe there's a significant problem under the regulations with unnecessary and duplicative reporting that would emerge in any regime like this.

First, we think that stablecoins should not in the ordinary course give rise to gain or loss, and we recommend that the final regulations remove stablecoin from the definition of digital assets, or at least remove brokers reporting obligations with respect to stablecoin, for stablecoin transactions. We believe that doing so would have an added benefit as supporting the U.S. dollars as preferred fiat currency throughout the cryptocurrency industry.

Second, we strongly encourage that at the very least, Treasury put into effect a multiple-broker rules [to] prevent multiple individuals reporting on the same transaction. We believe that the 8 billion figure that's been cited is likely much smaller than the number that would actually end up needing to be reported under this rule, and having a multiple-broker rule that would ensure that only one person is responsible for filing a 1099 with respect to any specific transaction, what we think would help mitigate some of the unnecessary reporting. And with that, I turn over to my colleague Kevin Kirby.

MODERATOR: You know what, it may be that your colleague, we've treated him as a separate speaker, so he won't run out of [time] because you all asked for two separate 10-minute blocks, so let's first see if we have any questions for Mr. McElroy. I had one question, which was you requested that we employ some sort of a multiple-broker rule. And the question for you is, who would you suggest be in the circumstance where multiple brokers are involved in a transaction, who would you suggest be the broker that's required to report,  No. 1, and No. 2, how would each of the brokers know that there's other brokers involved in the transaction to know that somebody else is picking up the reporting and that neither of the brokers are picking up the reporting?

MR. MCELROY: Absolutely. So, as outlined in our letter, we believe that the definition of broker should be limited to effectively centralized exchanges and those that effectuate transactions. And a simple broker reporting rule would be that if there is a transaction reported on a centralized exchange, any other potential brokers under these rules would be exempted from any type of requirement if there is a transaction on there, but somebody is providing the indirect services, which again, we believe should not be included in this. But if somebody's providing indirect services relating to a transaction that they know is going to be reported on a centralized exchange, connecting a wallet to a centralized exchange, for example. But you could think of many different types of individual and many types of entities that would be involved in that transaction. They should be allowed to say, we're not a broker because this is being carried out on a centralized exchange.

MODERATOR: Thank you. Do we have any other questions? OK, so then I'm going to introduce the other person from Fenwick & West separately, as our final speaker will be Kevin Kirby, also from Fenwick & West.

MR. KIRBY: Hi everyone. Can you hear me?

MODERATOR: I can hear you. Thank you.

MR. KIRBY: Great. Thanks for entertaining two speakers here. Part of the value add of the Fenwick blockchain team is our ability to bring a cross-functional approach to legal matters. So, we wanted to do so here. I'm not a tax lawyer, and in fact, I started my career as a banking lawyer at the OCC, the Office of the Comptroller of the Currency. And today I assist clients with regulatory matters in consumer financial services and AML/CFT.

I wanted to specifically highlight an opportunity for regulatory coherence that would come from aligning the broker reporting requirements with international standards for detecting and preventing illicit financial activities. Believe any regulatory approach to a new technology should be as clear as possible. To avoid the potential for stifling innovation, the IRS should seek to ensure maximum clarity about who is a broker and thus has a reporting obligation. We suggest that Treasury refine the definition of broker in the proposed regulations to comport with the guidance issued by the Financial Action Task Force, FATF, with respect to its anti-money-laundering and counterterrorist financing standards.

Consistent with its approach to combating financial crimes in the traditional financial system, FATF identified virtual asset service providers as those platforms that are capable of monitoring cryptocurrency transactions conducted through their systems. The term was defined broadly and according to function rather than to any specific technology. The associated guidance suggests its drafters had a sophisticated understanding of blockchain technology and appreciated the importance of a nuanced approach for imposing regulations on this new industry. FATF describes virtual asset service providers as any natural or legal person who, as a business, conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

• Exchange between virtual assets and fiat currencies,

• exchange between one or more forms of virtual assets,

• transfer of virtual assets,

• safekeeping and or administration of virtual assets or instruments enabling control over virtual assets, and

• participation in and provision of financial services related to an issuer's offer and or sale of a virtual asset.

Treasury cites this guidance approvingly in the preamble to the proposed regulations and in its DeFi risk assessment from earlier this year. Adopting a rule for tax reporting that would be harmonious with the FATF guidance also increases the likelihood that U.S. tax reporting regime would be consistent with that of other OECD countries, mitigating the risk of cross-border arbitrage and facilitating international cooperation.

Thus, we urge Treasury to align the definition of broker with the definition of VASP as outlined by FATF, or to articulate reasonable and clear instances of departure from such guidance. This approach would present a more workable outcome to many businesses as it would closely track the scope of intermediary regulation under market, prudential and anti-money laundering regulatory regimes. That's the balance of my time, thanks.

MODERATOR: Do we have any questions? No, OK.

PANELIST: Thank you for your comments. Am I right in understanding that the VASP definition would include decentralized platforms, or is that not correct?

MR. KIRBY: Thanks for the question. The FATF guidance actually has a very good discussion of what is and out of scope and has some thoughtful articulation of DeFi and the activities surrounding it. So, as a category, it doesn't say that DeFi behalf of another person, which I think is helpful.

PANELIST: So, as you may be aware, the proposed regulations also have rules that look to control. Do you view those rules as different from the FATF rules?

MR. KIRBY: As proposed, it looked like the broker definition was quite a bit broader than what we find in the FATF guidance, and that gives rise to concerns that there might be some contradiction or inconsistencies between the two. And hence, we're urging that in any final regulation, Treasury articulates the similarities and also differences between FATF guidance so that we can understand better how these two regulatory regimes interplay.

PANELIST: I have a question, a follow-up on that. We have not received your written comments yet. Do your written comments describe the circumstances under which you think somebody would be a broker under these proposed regs, but not under the FATF rules?

MR. KIRBY: We submitted them over the weekend, as Sean mentioned, and I'll make sure that if we have an opportunity to clarify that exact question, we can follow up with an answer for that.

PANELIST: Great. Thank you.

MODERATOR: Do we have any other questions? No. Thank you. So, this concludes the hearing. The IRS Office of Chiefs Counsel and the Treasury Department would like to thank everyone for attending today's hearing, especially our speakers who took the time to provide comments today. And this concludes the hearing. Thank you very much.

(Whereupon, at 12:03 p.m., the PROCEEDINGS were adjourned. )

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