The US Government is Trying to Kill Crypto | Miller Whitehouse-Levine and Jason Schwartz

Hey Bankless Nation. This is an emergency episode. We've got a job to do on this episode. We have two guests we're gonna introduce you to in just a minute, but I want to set the context for this episode. The US is trying to kill crypto right now. That is the US government. And more

Than usual.

What I'm pointing to specifically is an interpretation of some tax rules that came out uh from the IRS at the end of August. We haven't talked about this yet on Bankless because we've been waiting for the troops to get all of the content together in order to give you an easy call to action, a next step that you can take. But the the sh the short of this is there are some IRS interpretations that would effectively kill DeFi and crypto use cases in the United States, requiring

Not just use cases, not just DeFi. Touching a blockchain. We'll make touching a blockchain an illegal thing for tens of thousands of people who work in the crypto industry.

Right. Uh unless you are AML KYC it requires all of this kind of additional compliance. So effectively, this will be absolutely detrimental for the crypto industry in the US. But there is good news here. The good news is we can change the interpretation. It is a draft interpretation, it is not finalized from the IRS. And we have, I think, seven, six or seven more days in order to comment on uh this interpretation and get the IRS to reverse course. So this episode is a call to action. If you are a US listener, in this episode, you will find in the show notes a link to take five minutes from your time to actually generate. We've got an AI tool in the episode so you can AI generate a comment and submit it to the IRS. And I think, David, our guest said if we get 10,000 comments.

Ten thousand

It might delay

by one year.

Okay. It could delay this by one year. Uh so that is the call to action and what we're going to get into today.

Extremely easy. Me and Ryan both filled out our comments in after recording this episode and before doing this intro. And it took us both about three minutes.

Pretty easy.

Dave and I did it. And and by the way, you can adjust the uh severity of the AI's tone in generating your letter. There's like a you can be mild, you can be aggressive, or you you could be spicy.

Kind, yeah, you can be mean, like you can pick a tone, and you can you can you know imprompt it with your own concerns. It's really useful.

Yeah, so this is fun too. Uh actually let me just give you the website at the beginning of this. Go to protectdefy.org. Okay, we're gonna give you the call to action at the end of this episode too, but protectdefy.org if you don't want to listen to the content, you just wanna get started now, and uh you you know what to do here. David, is there anything we should say before we get into this episode?

There are few moments in time like this in which the crypto community has very specific actionable outcomes that we need to have happen in order to protect this industry. So if there if you ever do anything, it's times like this in which there are links and there are buttons that you can press to go make something positive happen. Some when we have opportunities like this, even though we it feels like dire straits, because it is, it's nice because we have the action steps that we need in order to effectuate change upon a positive change for our industry. Uh so please do listen to just the the call to action in the show notes. Our guests here are that you're about to listen to. Uh, we should be blessed that there are moments like this in which we can actually effectuate change. It's sad that we actually have to do it, but at least we have the tools to get it done. Uh, this is crypto. We are about coordination. We ought to be good at this. Uh and so this is the call to action, the the request that me and Ryan are making of you, bankless listener, to click that link in the show notes and get this done. So let's go ahead and hear as to why you should do the things in the show notes uh from our two guests, Miller and Jason. But first, a moment to talk about some of these fantastic sponsors that make the show possible, especially Kraken, a preferred crypto exchange for crypto in 2023. The people that are also helping us effectuate change in the regulatory world. Thank you, Kraken. If you do not have an account with Kraken, there is also a link in the show notes to get started with Kraken today.

Bankless Nation, I am incredibly excited to introduce you to our two guests today. Miller Whitehouse Levine has responsibility for the execution of the DeFi Education Fund, all of their mission and all of their goals. Prior to joining the DeFi Education Fund, Miller actually led the blockchain association's policy and operation work. He also worked at Goldstein Policy Solutions on a range of public policy issues, including crypto. And boy, are we glad to have him in crypto at this moment of time. Jason, welcome to Bankless.

Excuse me, sorry. Miller, Miller, welcome to Bankless.

Thank you.

Thanks for having me. We also have Jason Schwartz, who is a tax partner at Freed Frank, Harris, Shriver, and Jacobson LLP. That's a lot of partner names there. And he co heads the firms Digital Assets and Blockchain Practice. He has authored numerous tax articles on digital assets. And uh this is his bio, so I'm not saying this. Uh somebody put this in here, Jason. I apologize. He owns an embarrassingly large number of fine art NFTs. How those NFT prices holding up there, Jason?

Very proud of my collection. You can see uh just a small fraction of them behind me.

Well, it's great to have you both on Banklist. Thank you for uh coming on at such a time as this. And um it feels like it's almost like a kind of a dark hour for crypto in the US. Like what we're about to discuss is um is is somewhat heavy. We've titled this episode, and I don't think this is hyperbole, the IRS is killing DeFi. And it's not necessarily the IRS specifically, but it kind of is. But some people will react to that title and say, well, bankless is being hyperbolic. They are exaggerating the situation. It feels like every single week of every single month, we have a new crisis facing DeFi where the US government is about to kill it. But this time it really feels like it's warranted. And I remember in our back and forth about this episode, Jason, I was kind of pressing you on this. I was like, hey, Bankless Nation has heard us sound the alarm a few times about crypto. Why is it important to sound the alarm this time specifically? So can we just set up the problem? Then we'll get into the cause, and then we'll get into what to do about it. Because this is a very action oriented episode for um bankless listeners. But what is the problem? Like, what is actually going on here now, Jason?

Okay. So so let me start Ryan by saying I actually don't think that your title goes far enough. Well, I I I won't mince I I won't miss

Worse than killing.

I think that the proposed regs, if they were finalized in their current form, would not just kill DeFi. They would kill all permissionless crypto use cases for US citizens. So we're talking any website that you visit that would include NFT platforms as well, any potential payment applications for crypto, you would have to KYC literally to buy coffee with Bitcoin. Any uh obviously any DeFi, any use cases uh that appear within your crypto wallet, your wallets would have to KYC you. Every uh website would have to KYC you. So I think this goes for a lot of people.

Blockchain is what this sounds like.

Basically, yeah. Merely touching a blockchain uh through

really anyone who could potentially be viewed as an intermediary. You know, I and and I say intermediary, they're not intermediaries, but the IRS views them as such.

Right. Okay.

So so now it's a set it set it up, right? Yeah. Um

So in 2021, Congress uh changed the uh tax code to basically redefine what a uh broker is. Uh as you guys know, probably, you know, brokers have to 1099 you, right? So if you sell your stock through a broker, um, they send you a 1099. And

And what that means, Jason, is a 1099 for people who aren't familiar with the no nomenclature is basically they have to know your identity, they have to know your address, and they send a tax form to your house basically on what your transaction activity uh is, like what your your gains are. And sometimes you might get this in the form of uh an interest payment, say, from an exchange or you know, a specific set of trades or something. And so if you are a broker dealer, then you are obligated to send these tight 1099s to anyone who had any sort of uh trading, buying, selling, um, exchanging type of activity within within your exchange. That's what a 1099 is.

that's exactly right. Um, and brokers have to send a 1099 to the IRS with a copy to the taxpayer. So the IRS has uh your information regarding each transaction, and you have your information. So you can calculate your taxes. Now

Mm-hmm.

It's always important when in TradFi to receive 1099s because TradFi is not blockchain, right? So when I sell stock, um, what I'm really doing is I'm relying on JP Morgan or another broker to sell the stock and record that sale on their own private ledger to which I do not have access, right? So in order for me to know how much gain I recognized, uh JP Morgan has to tell me.

Because I can't go and check etherscan to see how much gain I recognized. I just

Not open. It's it's a private database. So you exactly as a t as a taxpayer, you wouldn't even know what the numbers are unless your intermediary actually supplied them to you.

exactly

The the intermediary is the oracle, is the source of truth. Therefore, they're the ones with the responsibility to tell you what the truth is because they're the intermediary.

exactly so consistent with that, the definition of broker

since nineteen seventeen, uh practically since the tax code began, has always been someone who either

Uh is acting as a broker on an exchange, right? Is a licensed broker, or you know, more recently, since 1983, someone who has been acting as your agent or your principal in connection with your sale of stocks, securities, bonds, etc. Okay. And that makes a lot of sense, right? Someone acting as your agent would be someone who actually custodies your assets or deals directly with the custodian and directs the custodian to make sales on your behalf. Someone acting as principal is the liquidity provider in the market who you're trading against, right? Um

in

Uh 2021, Congress said, well, you know, we should uh apply 1099 reporting to brokers in the digital asset space as well. Uh so they amended the tax code to include, in the definition of broker, someone who effectuates transfers of digital assets on behalf of others uh for compensation. Okay.

Which is

uh honestly, you know, not particularly controversial in my mind. I mean, um, if you uh if you take if you take that language at face value,

Effectuating transfers means, you know, to cause a transfer, right? If you check Merriam Webster, effectuate means to cause or bring about. Um so you can y you know, y it's sort of sensible to say, well, look, like if Coinbase effectuates a transfer of my ETH for me, uh then of course they should send the ten ninety nine

Transfer kind of implies an intermediary is what you're saying. Even exactly. The dictionary definition of the language here.

Exactly. Now, in connection with making that change, there was some back and forth. And Miller has, you know, all of the background details on that and can get more into it. But basically, what happened was a number of people did express concerns that effectuate transfers could be read really broadly, you know, and it might, for example, include validators.

So there was some back and forth between Congress and Treasury. There was actually a letter that Treasury wrote, an open letter to several senators, saying that the regulations will be based on principles broadly similar to those applicable under current law for brokers. And uh ancillary parties who can't get access to information that's useful to the IRS will not be captured by the regulations that we issue under this statute.

Okay, so I kind of remember a little bit of this back in 2021, and I remember a minor uh uproar from the crypto community, right? And then I I um like the the the question or the concern as to whether this would reach out to like um uh be applicable to validators and miners, right? And then I do remember that that letter from from um the IRS from Treasury coming back and saying, hey, we're gonna be reasonable out about this. Of course it doesn't apply to miners, and it'll just be like the brokers that you would expect. We're going to be reasonable. And then the crypto community kind of like, okay, cool, they're gonna be reasonable. We we have the language effectuate transfer in the actual legislation itself. So we're probably fine. That's what it felt like at the time. But it turns out, Jason, we are very much not fine, right? So, like what happened?

Not at all. And um

I don't know what happened, but what we ended up with are these proposed regulations, which would do very broadly two things. Number one, they would treat everything tokenized as a digital asset that is potentially subject to 1099 reporting. So we're not just talking about, you know, Ether, Bitcoin, et cetera. We're talking about NFTs, we're talking about stable coins. Um, we're even talking about like tokenized stocks and bonds, even though there's already a 1099 regime for them. We're just gonna add more 1099 stuff to them. So literally anything tokenized, even if the real world analog would not be subject to 1099 reporting, like in the case of collectibles, um, we're we're gonna say, okay, there's 1099 reporting.

So if I sell you a uh Pokemon card at my yard sale, right, I do not have to issue a 1099 to you about that that transfer, right? But if I tokenize that Pokemon card and then I sell it to you, then I am quite possibly under this interpretation a broker, and then I would have to issue you a 1099. Is that what you're telling me, Jason?

That's exactly right. And not quite possibly, definitely.

Oh my god. Whoa,

And definitely is because of the way they define broker. So remember that Congress said that a broker is someone who effectuates transfers of digital assets on behalf of others for compensation. The IRS redefined that to say, oh, effectuates means directly or indirectly effectuates. And we're going to interpret that to mean facilitates if you're in a position to know the identity of the seller. Now, what does that all mean? That's a lot of words and kind of word soup, frankly.

facilitates according to the proposed regs

is really everything. So a website facilitates, a wallet facilitates. Although the regs don't get into it,

There doesn't seem to be any limitation whatsoever on facilitate. So presumably, like if you run an RPC node, you're facilitating. If you provide liquidity, you're facilitating. If you're a validator, you're facilitating. I mean,

really, there's there's no there's no end uh that we can discern within the proposed regs to what facilitate means. And then you might say, oh wait,