In a significant twist, the Internal Revenue Service (IRS) has set its sights on an unexpected target: Software developers. This move has been brewing since August 2021, when Congress passed the Infrastructure Investment and Jobs Act.
The Evolution of the Broker Definition
The legislation introduced a new definition of a “broker” in the context of digital assets, intending to align it with historical understandings of brokerage. However, the ramifications of this seemingly innocuous move are now raising concerns across the digital assets industry.
Originally, the digital assets industry reacted strongly to the change, pushing for adjustments to align the bill’s language with Congress’s intent. Despite these efforts, the fix didn’t materialize, and the bill passed with the updated definition intact. The insights in this article are drawn from a tweet by Kristin Smith, shedding light on the critical implications for software developers in the crypto space.
IRS Proposal and Unintended Consequences
Fast forward two years, and the IRS has released its proposed regulation, interpreting Congress’s broker definition. The interpretation, however, has far-reaching consequences, potentially including individuals who should not logically be considered brokers. One such group is software developers who have worked on the front-end interface of a Decentralized Finance (DeFi) protocol. The IRS may classify them as “in a position to know” about future activity on that protocol, subjecting them to onerous reporting requirements, including furnishing 1099s.
The Burden on Developers and Industry Outlook
The proposal burdens developers, potentially forcing them to cease work or seek more welcoming jurisdictions. If adopted, this definition could lead to decimating the digital assets industry in the United States, as compliance for such individuals would be nearly impossible.
Crypto’s adversaries recognize the potential impact of this move and are fast-tracking its implementation. The urgency of the situation is underscored by the fact that if the IRS adopts this updated definition, it could deal a critical blow to the entire digital assets industry in the country.
Seizing the Opportunity for Public Input
However, there’s a window of opportunity for concerned individuals to make their voices heard. The Treasury Department and the IRS are currently open to receiving comment letters on how this rulemaking will affect individuals until October 30. Leading the charge, individuals and organizations, such as the DeFi Education Fund, are planning to submit their own letters to highlight the impracticalities of the proposed regulation.
This predicament brings to light the need for a legislative fix. In 2021, there was a missed opportunity to address the broker issue comprehensively.
Active Participation in Shaping the Future
Presently, there’s hope in the form of Representative McHenry’s Keep Innovation in America Act. Advocates are actively supporting this bill, urging a swift House vote. In the interim, it’s crucial for those potentially affected to voice their concerns to the IRS and help shape a more balanced and practical regulatory framework.
As the deadline for comment letters approaches, individuals are encouraged to participate actively in this process. By doing so, they can contribute to the ongoing dialogue, potentially influencing the outcome and preventing unintended consequences that could stifle innovation in the digital assets space.
