Re: IRS Proposed Rulemaking REG–122793–19, Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions

To Whom It May Concern:

Consensys Software Inc. (“Consensys”) writes to comment on the proposed amendments in this rulemaking. As a leading programmable blockchain software company, Consensys requests that the final regulations reflect the complexities of how digital-asset platforms work, ensure the continued development of the digital-asset industry, adhere to the revised IRC § 6045 and the Administrative Procedure Act, and thus impose reporting obligations on only bona fide digital-asset brokers. The letter makes the following four points:

First, the reporting requirements must be structured with great care and a full understanding of their consequences given their importance to the digital-asset economy and software developers like Consensys. The proposed regulations would impose a new and complex regulatory scheme on software developers and others in a fast-growing industry with unique technical and operational features. Many if not most of these parties have no historical experience with, offerings built around, or support systems for such reporting and would need to build compliance programs from scratch. Software developers, from larger players such as Consensys to garage-band projects with a few engineers, would need to dramatically overhaul their business practices to come into compliance if the proposed amendments are finalized in their current form. In some respects, there is serious doubt they could even do so at all.

Second, these concerns can be largely avoided if the final regulations track the unequivocal intent of Congress. As written, the proposed amendments sweep beyond what Congress contemplated in section 6045. In making clear that digital-asset brokers are brokers for tax reporting purposes, Congress did not intend to overhaul the fundamental concept of a “broker” under section 6045. As a result, the IRS may impose reporting requirements on those who perform the kinds of functions that have long been covered by section 6045—principals, agents, or other intermediaries who effectuate digital-asset transactions as that term is plainly understood. But the IRS may not through creative interpretation go beyond this settled understanding to include ancillary services, like the licensing of client-side software and software services that taxpayers use on their own to research, select, and execute transactions on their own behalf. Likewise, the IRS may only impose reporting requirements; it may not set 1 policy over digital assets generally. The proposed amendments should be narrowed to ensure they conform to these limitations, and the IRS should ensure greater clarity in the final regulations by clearly setting forth which kinds of service providers fall outside their scope.

Third, key aspects of the proposed amendments would benefit from further consideration against the backdrop of the Administrative Procedure Act. The APA requires that agencies consider all important issues before issuing a rule, and courts routinely set aside regulations that do not meet its reasonableness standards. Here, multiple aspects of the proposed amendments run afoul of the APA as written: The notice of proposed rulemaking (“NPRM”) offers incomplete analysis in rejecting any form of a multiple broker rule, covers certain digital-asset transactions unlikely to give rise to any meaningful realization event, overlooks the extent to which regulated parties may be unable to comply with the proposed amendments as formulated, and gives inappropriately short shrift to the required cost-benefit analysis. To illustrate that last point, we discuss with particularity our current estimates of the time, money, and manpower required for Consensys to come into compliance, and how that math casts meaningful doubt on the IRS’s cost estimates. In sum, the proposed amendments would impose unnecessarily high burdens on regulated parties, an overwhelming percentage of which are small businesses (as the proposed regulations expressly recognize) that would be acutely affected by regulatory burdens.

Finally, the IRS should delay the deadlines set out in the NPRM. Given the complexity of the proposed amendments and their profound impact on digital-asset ecosystem participants—and software developers in particular—we respectfully request that the IRS further extend the notice-and-comment deadline to December 31, 2023, to ensure that affected parties have sufficient time to study and comment on the NPRM. Given the extraordinary burdens with implementing rules that go beyond the reporting regime that Congress called for, the IRS should also delay any implementation deadlines for the final regulations until (1) the IRS promulgates rules in pending matters that bear on broker reporting (such as cost-basis transfer rules), while (2) giving regulated parties multiple years thereafter to come into compliance. We would also recommend that the IRS provide later phase-in deadlines for particularly difficult aspects of the regulations, such as reporting and withholding by DeFi and non-custodial service providers. This longer runway is necessary so that newly-reclassified brokers could build compliance programs properly, in full knowledge of all the relevant specifications, while also maintaining day-to-day operations.

Consensys requests that the IRS consider these concerns and stands ready to engage with the agency to the extent we can be helpful in the rulemaking process.


The Proposed Amendments Are of Immense Importance to the Digital-Asset Economy Generally and Consensys in Particular.

In 2021, Congress amended IRC § 6045 to make clear that digital-asset brokers are brokers subject to the Internal Revenue Code’s broker-reporting requirements just like brokers 2 engaged in traditional finance.1 The amended statute defines the term “broker” to include not just dealers, barter exchanges, and those paid to act as middlemen for property or services, but also “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”2 The IRS has thus been tasked with promulgating implementing regulations governing exactly which persons qualify as digital-asset brokers and when and how such brokers must submit information returns to the IRS and payee statements to customers.

Consensys appreciates that, since the passage of the section 6045 amendment in the IIJA, the IRS has moved cautiously in formulating the NPRM required by this statutory amendment—delaying its release to give the IRS a full opportunity to evaluate how to impose complex regulations on an important, fast-growing industry. The IRS should take a similarly judicious approach in considering the concerns posed by Consensys and other industry commenters. These regulations will have extremely important implications for U.S. digital asset companies and users alike, and it is imperative that the IRS craft the regulations with an eye towards both the practical realities of the digital asset ecosystem as well as the legal and prudential limits of its authority.

The digital-asset broker regulations have high stakes for several reasons. As an initial matter, the IRS is imposing a comprehensive regulatory framework on a major, developing industry—one with a market capitalization of over $1 trillion, and which for the most part has little to no experience with such regulatory requirements. How these rules are written and the timeline for implementation will affect not just how the U.S. digital-asset ecosystem evolves but also the evolution of this new global technological wave generally. As a result, while most IRS regulatory amendments require experienced regulated parties in solidified industries to make adjustments to their existing compliance programs, this one would force a wide range of entities to create compliance programs from scratch and even to overhaul their consumer offerings, since most digital-asset entities have not been treated as brokers up to this point.

The distinguishing features of the digital-asset industry also magnify the impact that the proposed amendments would have.