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1 1 (August 25, 2021)

handle is hein.crs/goveekq0001 and id is 1 raw text is: rcpssional Research $ervieq 9 August25, 2021 Cryptocurrency Transfers and Data Collection Overview The extent to which the government shouldcollect data on and require reporting ofcryptocurrency (crypto) transfers has been the focus ofrecent policy discussions. Both the Biden Administration's FY2022 budget proposal and H.R 3684, as amended and passed by the Senate on August 10, 2021, would enhance and expand taxinformation reporting for certain crypto transfers. Requiring more data collection on crypto transfers presents policymakers with a potential trade-off. On the onehand, enhanced datacollection and reporting could lead to increased taxrevenue and lower levels of illicit financial activity. On the otherhand, enhanced data collection could lead some crypto market participants to move their operations offshore to avoid government oversight, which may negatively impact a burgeoning sector of the U.S. economy. This In Focus summarizes currentdata reporting requirements for certain crypto transfers, reviews recent policy proposals, and presents selectedpolicy considerations. Cryptocurrency Transfer Practices Crypto transactions are typically carried out over a crypto exchange, which is a type of financial institution that facilitates the trading, buying, and selling of various crypto assets such as Bitcoin, Ethereum, and Litecoin. Several crypto exchanges, such as Binance and Coinbase, are licensed andregulated at the statelevel as money transmitters, atypeoffinancialcompanyclassificationthat includes other firms such as Western Union, MoneyGram, and PayPal. Some banking institutions known as custody banks also provide crypto transfer services. (In addition, if exchanges transact digital as set securities, they are subject to securities law, which is outside of the s cope of this In Focus.) Money transmitters generally carry out threebusiness functions: (1) receiving and sending money onbehalfof consumers; (2) providing products that receive, store, or send money for customers; and (3) exchanging currencies. Unlike banks, money transmitters do not accept deposits or make loans but instead provide alternative mechanisms for people to transfer money. Current Data Collection Current federal data collection efforts on crypto transfers stemfromtwo sources: the needforadditionaldata sothe InternalRevenue Service (IRS) can administerexisting federal tax law and anti-money laundering (AML) policies that implement provisions of the Bank Secrecy Act (BSA; P.L. 91-508)-the primary U.S. AMLlaw. Internal Revenue Service The IRS collects dataon crypto transactions in its role as the administratorofthe Internal Revenue Code. The IRS has clarified, via Notice 2014-21 and an FAQ on virtual currency transactions, that taxp ayers are required for tax purposes to treat crypto transactions in the s ame manner as trans actions involving other mediums of value (e.g., cash, checks, stocks). For example, crypto transactions are subject to the taxcode's capital gains and losses rules. Similarly, federalincome and employmenttaxrules apply when crypto is used by a business to compensate an individual for service provided. Crypto transactions are also generally subjectto the same information reporting requirements as non-crypto transactions. One exception appears to be the federallaw requiring businesses to report transactions exceeding $10,000 in cash to theIRS using Form8300. IRS Commis sioner Charles Rettig stated at a June 8, 2021, Senate Committee on Financehearing that he believes congressional authority is neededto apply the cash trans action reporting requirements to crypto currency. In general, the data collected by the IRS primarily come from voluntary reporting on annual taxreturns and third- party information returns, as well as from summons and audits. IRS data, however, are far from complete, especially with respect to cryptocurrency. This reflects the intent of most cryptocurrencies to stay off the radar screen, as Rettig stated at the hearing referenced previously. Incomplete voluntary reporting ofcrypto transactions contributes to the taxgap, or the difference between the aggregate amountof taxes legally owed andthe aggregate amount of taxes collected. Financial Crimes Enforcement Network The federal agency responsible for implementing regulations for money transmitters and provisions of the BSA is the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN). In 2013, FinCEN issued interpretative guidance for virtual currency exchanges, statingthatan administrator or exchanger that (1) accepts and transmits a convertible virtualcurrency or (2)buys or sells convertible virtual currency for any reason is amoney transmitter under FinCEN's regulation. This guidance effectively brings crypto exchanges under the s ame reporting regime as other money transmitters. Money transmitters are required to register with FinCEN within 180 days ofbeing established, and theseregistrations aresupposedtoberenewedeverytwo years. Money transmitters must maintainfinancialrecords and conduct customer identification procedures for certain transactions, https://crs rept

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