Unchained - Not Reporting Info on Some Transaction Partners Could Soon Be a Felony - Ep.284

Starting point is 00:00:00 Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the October 26th, 2021 episode of Unchained. My book The Cryptopians, Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Cray is available for pre-order on Amazon, Barnes & Noble, Bookshop.org, or any of your other favorite bookstores. Go to Bitley slash Cryptopians. That's B-I-T-L-Y-S-C-R-Y, P-T-O-P-I-N-S, and pre-order today. The Crypto.com app lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% interest on your Bitcoin and 14% interest on your stable coins, paid weekly. Download the Crypto.comcom app and get $25 with the code, Laura. The link is in the description. The Notel Cash app makes earning crypto on your smartphone as easy as turning on your Bluetooth. Notal Cash is private, secure, and available on iOS and Android.

Starting point is 00:01:12 Visit nodal.io slash unchained. That's NODLE.io slash Unchained to start earning Notal Cash. Today's guest is Abe Sutherland, an advisor to the Proof of State Alliance and adjunct Professor at the University of Virginia Law School. Welcome, Abe. Thanks. Thanks, Laura. Today we'll be discussing a provision in the infrastructure bill that amends tax code section 6050I,

Starting point is 00:01:38 and we'll be talking about its implications for people transacting in crypto or even NFTs. But first, Abe, why don't you give us a short history of your professional background and how you came to be involved in crypto and what your current involvement is? Sure, so I'm a lawyer, but got interested in cryptocurrency and its fundamental economics, which led me to some tax questions because tax issues were some of the most practical elements of a proper understanding of how decentralized and cryptocurrencies work. That got me interested in substantive tax issues. And what we're about to talk about today is actually very, very different.

Starting point is 00:02:17 It's not substantive tax, but it came up in the context of the tax code and this infrastructure bill, and that's what brought my attention to it. So let's dive into the meat of the discussion then. us about this proposed amendment to section 60-50-I. What does it require? Well, the first thing is to point out that this is something very different than what a lot of people are familiar with in this infrastructure bill. This infrastructure bill was passed by the Senate in early August, and it's still pending now in the House. And what we heard about and what eventually garnered headlines and a lot of attention and including debate on the Senate floor was a different section regarding the definition

Starting point is 00:02:55 of a broker that would be required to report their customers' tax information to the IRS. This is different. This is a separate amendment to that same bill, but unfortunately hasn't gotten the attention, which is what I've been focusing on. This provision, as you say, it's an amendment to tax code 60-50I requires recipients of digital assets in a lot of situations to verify and record and report the personal information, the Social Security number, address additional personal information of the person from whom they are receiving the digital assets. And under the current rules, to report that to the IRS within 15 days. And so why have you been sounding the alarm about this? Primarily because I think it kind of slipped by and didn't get the attention it

Starting point is 00:03:46 deserves. And we'll talk a little bit about why it might have slipped by. But the first reason is, this was input into an infrastructure bill, a spending bill, and it was justified there on the grounds of offsetting some of the cost of spending in this infrastructure bill. It's known as a pay for. In general, that's saying, hey, how are we going to pay for this? We're going to say increase taxes or maybe close a loophole or do something that might increase the amount of taxes collected. So this was justified as a tax provision. But one of the key points I want to emphasize here is that this really is not a tax provision as we typically think of it. This is a criminal statute. It actually creates a felony that is concerned with the collection of information,

Starting point is 00:04:30 and then a little deeper than that, is concerned with really fundamentally guiding and controlling how transactions are made. So this is designed to discourage peer-to-peer transactions and transfers of digital assets. And what the statute says is that when a business receives digital assets over a certain threshold, and we'll talk about that, is it's a lot of. It's a It's their duty to verify personal information and to report it. Right now, that's on an IRS form 8,300. And I mention next, I encourage people to look it up. This is an existing law and an existing requirement for another type of transaction,

Starting point is 00:05:05 which is transactions in physical cash between two people who we can presume are transacting face to face. So the reason that this provision didn't get the attention immediately that it should have is it uses an old statute. This was passed in 1984. And it was designed to discourage a large cash transactions as it basically an anti-crime measure, anti-money laundering, anti-tax evasion. And it governs transactions between two people face to face. And that's what it says. It says if you receive cash in this situation over $10,000, you need to fill out this form and probably file it with the government.

Starting point is 00:05:44 So let's walk through various examples of what complying with this requirement would even look like. for different types of crypto transactions. Why don't we just start with a basic payment? We can walk through some really clear applications, but that's one of the problems here, and we're going to explore that too, where it's very unclear what it will do and how much discretion it gives to the Treasury Department.

Starting point is 00:06:06 And again, some of these violations can be felonies, which is unique in the tax code, even for reporting provisions, other reporting provisions. If there's a violation, it might be a misdemeanor. But this one stands out for A being a felony. And B, most of these reports are, reporting provisions don't really affect end users and consumers and businesses. They're designed to utilize middlemen like brokers and employers who have this information

Starting point is 00:06:31 and lean on them to report this information to the government to ensure proper taxation. This one is very different in that it puts that burden on anyone and everyone. So in a straightforward situation, well, you know what, let's start with the cash example, because there we can see where it's clear, and then we can start seeing how this leads to impossibilities for enforcement or at least compliance. The first thing is to note that the statute is triggered and the requirement to file a report whenever a person in a business situation receives cash,

Starting point is 00:07:10 it has nothing to do with the tax consequences. It doesn't mean that that might be taxable income. It doesn't mean that it might even be revenue. You can be in a custody situation, right, where you're holding, somebody hands you $15,000. And in some circumstances, it's your duty to report that even if you're not going to keep it, even if you have no claim to it. So in that situation, in the cash scenario, you are required, the regulations are very clear. You must inspect an ID document and verify that they are who they are. And then collect a bunch of information.

Starting point is 00:07:41 The statute requires the social security number, a name and an address. And then there's more information required. They want to know the occupation of the person who's paid you the cash, the nature of the transaction, and other details about it. When you receive that, then you have to fill out this form 8300. And again, I encourage people to take a look at it and file it with mail it or file it online with the IRS within 15 days. So that's a straightforward transaction. If you go tomorrow and buy a car and pay with cash, this is what will happen. They will ask to inspect your ID.

Starting point is 00:08:16 They'll ask you for your Social Security number, and they will fill out this form 8300. And I did see that you wrote somewhere or somebody wrote somewhere that on average it takes 21 minutes to fill up form 8300. Yeah, that's one of the reasons. I encourage people to look at this form and look at the instructions and look at the manuals. It's a lot of detail. And that's right. The government itself estimates it takes over 20 minutes to fill out one of these. And so that was a basic payment.

Starting point is 00:08:43 what if we're doing more like a crypto trade peer to peer, two different digital assets for each other, then what? Right. So one thing your hypo gave of a trade of digital assets is let's pause and focus for a second on the definition of digital asset in this statute. So what it says is any receipt of a digital asset. And this was discussed in connection with the infrastructure bill, this very broad definition. And it means any form of digital value basically involving distributed. ledger technology. And it might even be broader than that. It gives tremendous discretion to the Treasury Department to say what exactly that is. So what that means is, not only is this, you know,

Starting point is 00:09:23 Bitcoin when used for a payment, but it could be any form of a digital asset, but certainly including things like NFTs that we don't think of as payment devices. And that also makes clear that you could definitely have a situation where the statute on its face commands both people to report on the other because, again, this is based on receiving a digital asset. It has nothing to do with, you know, the tax consequences. So a situation where one party ends up with an NFT, another party ends up with some cryptocurrency on the face of the statute, they both have to report the other Social Security number. And what about cases in which someone's transacting with a smart contract?

Starting point is 00:10:02 Does this affect that type of transaction or no? Well, there's, in some sense, there's a lot of open questions. because, again, and this gets to why people haven't really focused on this, the statute was absolutely presumes that you're talking about two humans handing over physical objects. So, you know, there's some details about what it means to be, to receive something. But in the context of digital assets, yeah, it's kind of up in the air what the outer limits of that would be and what happens if it is mediated by a smart contract. But we can at least assume that in certain cases, or think about multi-

Starting point is 00:10:38 multi-sake situations. Three people, three different parties receive, you know, in a two-of-three situation. Who might be committing a felony if they don't report it? So those are questions about the nature of a receipt. But we can certainly say that in a lot of situations, you know, if there's assets in an address under your exclusive control, that's very likely going to be a receipt. but it also means it's hard to imagine in the cash context, somebody not knowing, right? But these are permissionless often payments. So what happens if you, quote unquote,

Starting point is 00:11:13 receive digital assets and are not aware of it, or you didn't invite the transaction? Because, again, it's your duty then, within 15 days under the current rules, to have verified and reported the information about the sender on the other side. But thinking about smart contracts, maybe you had some,

Starting point is 00:11:32 I've got more thoughts on that, maybe you had something particular in mind about? Not necessarily, but obviously there are situations right where, for instance, let's say that you and I are engaged in some kind of transaction and we decide to use an escrow contract rather than an actual third-party escrow service, then would you just report my personal information when you do this reporting? or I don't, or maybe it's just something that's not resolved. Well, it's not resolved, but it's worth asking these questions because it exposes how incongruous this statute is with the technology that we're dealing with.

Starting point is 00:12:18 And there are, but it's a great question and we should work through it to kind of speculate on what that would mean. If you put money into an ESCO contract and it won't be unlocked and in my possession until a future date, that's a good question. And my guess is, if I were trying to comply with this tomorrow, I would say, you know, it's not mine until I have, you know, some intuitive notion of control over it in terms of what a receipt means. But it's a very big open question. And again, one that you don't really run into in the context of physical cash because you're both there and you know, you know when you got it. Yeah. I guess another one would be a peer-to-peer lending happening in defy. But those assets are pulled.

Starting point is 00:12:59 So, again, it's not clear. if they would require that somehow, you know, it is tracked. And then the recipient has to report. But, okay, so let's actually just discuss another issue that you raised earlier, which is the threshold, which is $10,000. So is that just whatever the value of the digital assets are on at that moment of the transaction? That's the most likely interpretation, especially if you're dealing with something, anything other than a dollar denominated coin. Yeah, it's value on the time at the time or on

Starting point is 00:13:38 the date. But the issue of the structure is really important for other reasons. And again, we have to emphasize why this is just so different than physical cash, because with cash, you can say, oh, well, if it doesn't, if it's not a big transaction, it doesn't qualify and you don't need to report it. But the rules are actually more complicated than that. It's the transaction has to be at over $10,000. And that can include related transactions. And it can also include payments over time, which under the rules would be one transaction. So, Laura, if I lent, you know, if I lent you $50,000 in some digital asset, and you made recurring payments back to me, what the rules say is that that's one transaction. So as soon as those payments add up to $10,000,

Starting point is 00:14:20 that's what triggers the requirement and the 15-day window to make a report. And if you continue to make payments, when those add up again to $10,000, it trips it again. So number one, you've got this duty to monitor and these valuation questions, which you raised, but also explaining why with digital assets, the whole definition of a qualifying transaction, you know, can be much, much broader and extend over a period of time. Yeah, and another issue, of course, is that prices change a lot, even within the course of a day. So if I make a payment to you of $9,500 in Bitcoin or something that's similarly volatile, then who knows whether or not the IRS might say, no, no, no, no, this was $10,000 based on the closing price of that day.

Starting point is 00:15:13 So, yeah, so that's another issue. So do you, what's your take on how possible it is for the sender and recipient to comply with these rules? because one other issue was that I saw that they're required to keep these records for five years. And just kind of on a security level, I just could imagine this could lead to a lot of identity theft because you would, like, you'd have to give your information out to all kinds of people that you were transacting with. Well, I guess it depends on how often you transact in $10,000 or more. But still, if they're required to hold up for five years, how could you? be certain that they were holding it in a way that was secure?

Starting point is 00:15:59 Absolutely. So this puts all kinds, opens up this typically behind the scenes practice of certain surveillance, usually conducted by entities like banks or employers that kind of already have that information in place. And it applies this surveillance and storage and security burden on any business, as well as some others that might want to be involved. And so it's a very big concern. So not only is there a requirement to verify and gather this information, the first requirement is at the end of the year, you have to send a statement to everybody whom you've reported

Starting point is 00:16:39 during the year. And then, just as you mentioned, you must keep these records for five years. So it really radically expands kind of the implications of the surveillance efforts that the government is looking for by. opening it up to potentially any business. And even broader than that, I want to make a point about that. So this applies to receipts in the course of your trade or business. And it's kind of, you know, we tend to know it when we see it,

Starting point is 00:17:10 but it's important to note that that's not defined clearly in the tax code. It's actually a test which is applied by courts. And it has to do with whether you have gain-seeking activity that's suitably continuous and regular that means that you're, doing something in the course of trade or business. And that's important to note because even that definition, it could be unclear whether certain activity meets that test. If you're a minor, if you're a staker,

Starting point is 00:17:36 if you're doing various lending activity or significant trading, in some cases that can put you into the category of trade or business. But it's not a clear line. And again, these are felonies. So the difference can be really important in terms of your compliance and legality. Yeah, and so I did see that that would then be punishable by up to five years in prison and a $25,000 fine, which just out of curiosity, actually, why is the penalty for this so much more than for other violations? Well, there's some interesting history on this and how this, you know, this original law was passed in 1984. And then periodically over the years, it expanded, even this provision expanded. Actually, we should go back a little bit further.

Starting point is 00:18:23 and this is really important as well to understand how this fits in with other forms of regulation that, again, some of us in crypto are familiar with, but it's mostly behind the scenes, and that is the Bank Secrecy Act dating to 1970. And what's key there is the provision that began where requiring banks, but only banks, to report very large $10,000 transactions. And in 1970, that was a big deal relative to now because $10,000 then, $65 or $70,000. thousand dollars today. So as inflation is eaten away with that, these thresholds have not changed. So in 1984, as a part of a large tax overhaul, this provision was added. And then over the succeeding

Starting point is 00:19:08 years, there were gradually amendments to it, which number one turned it into a felony. Because again, this is really not so much about tax. It's about crime fighting. So in 1988 is part of an anti-drug bill at the height of the drug war. That's when this was escalated to a five-year in prison felony, as well as other little changes, right? Some people might be familiar with the concept of structuring. So when there's a rule that says you can only, you know, you have to be reported if you do something over $10,000, first thing people do is, oh, I'll bring you $5,000 in today and $6,000 in tomorrow. So that's a crime.

Starting point is 00:19:44 So these different elements were added, including most recently, I think, with the Patriot Act in 2001, on strengthening and kind of closing down loopholes and increasing the amount of punishment here. And it reminds me of one point that's really important here. Some people might say, well, I'm not a business and I'm never going to be a business. So I'm never going to have to report if I have a receipt of $10,000 or might add up to that over time. But it's important to see how this creates a felony, again, five years, for people who transact with others. So if you're even a consumer making a payment of $10,000 or more or in related transactions, if you interfere with that business's duty to report the transaction, that also is a felony.

Starting point is 00:20:33 So if you try to dissuade them or you give them false information or give a false Social Security number, that too can be a felony. Yeah, but like this thing about what you're required to give them, When I read what the requirements are, which are name, birth date, address, social security number, and occupation, it just feels like you're giving away all the information that someone would need to, like, fake your identity and just, you know, open a credit card with your name. So I don't know how many people are going to be willing to do that. But anyway, one other issue that was interesting was obviously crypto transactions are push transactions in which the recipient, you know, doesn't have to do anything in order to receive a payment. So what would happen if someone unknown to the recipient sends them more than $10,000 worth of crypto? Well, the first thing to note is if that recipient says, hey, you need to give me this information.

Starting point is 00:21:34 And that party says, you know, willfully refuses, A, that's a felony. So what's going to happen in practice? Look, there's so many unknowns about how the Treasury Department is going to try and make this work. but thinking kind of commonsensically about what you do in these situations is the business will report it with the available information, right? And then do their best and say, hey, I've tried my best. And then it's up to the IRS to use those clues. I bought a car a few weeks ago, and I paid in cash just to kind of experience this. And I was talking to the guy who sees Form 8,300 a lot.

Starting point is 00:22:11 And he was asking for my social security number, and he kind of made a joke. He's like, well, if you don't give it to me, you know, no big deal. I'll make a note that I tried to get it. And then, you know, the IRS will give you a phone call. You know, he had the rest of my information. You know, he would have done his duty and then I would have gotten a call from the IRS. Okay. So maybe then it wouldn't be, I mean, you know, as you say, the penalty for this is considered a felony.

Starting point is 00:22:37 But it seems like at least when applied for cash transactions, people who typically work in this area don't seem to think it's such a big deal if they don't dot all the eyes and cross all the T's? No, no, no. It's more, look, actually, it's a very good question. There's all kinds of different penalties. And the truth is, and when it's a felony, that's a crime and you get a jury and, you know, prove it beyond a reasonable doubt and you have questions of intent and so on. So, but the fact that this felony is really important because it can be used and that's hanging out there. But there's a lot of other options for the government to do an enforcement. And typically, it's, it's, it's, it's, it's, it's, you said a maximum of $25,000. Actually, in some circumstances,

Starting point is 00:23:19 $25,000 is the minimum fine for a certain type of violation, but minor violations can, can also result in smaller fines. So it's not always going to be a felony, but the, the, the, the, the, the, the fact that it's a felony, uh, is important, and it's important for raising attention to what was done in the course of a spending bill, right, and in, in a tax provision in a spending bill, because it really cuts, and it should make really immediate and aware to the to the public what is going on in terms of government efforts with regard to digital assets generally and these tax issues because so much of this and we lawyers who work in this space are familiar with it and in fact a lot of

Starting point is 00:24:04 people are because these questions about what's going on in Washington, people do pay a lot of attention to it. But this really makes it more immediate and puts it in our face because because of the way it affects kind of end users, businesses, and even us just using digital assets. So in general, what effect do you think that this provision could have on the effort to move to more decentralized business models? Okay, so to look at this, we've got to look at kind of the next level implications of this. And that, as I mentioned before, the Bank Secrecy Act. So we have a very confusing regulatory hodgepodge in the United States. States with the different agencies involved in this. But here I want to focus on something in

Starting point is 00:24:48 particular. So this provision, which is now sitting in the house to be passed, is ostensibly, you know, and literally a tax code provision. But it works together with other regulations under the Bank Secrecy Act. And the Bank Secrecy Act generally doesn't regulate you and me. It regulates banks and financial institutions. And financial institutions is actually a much wider category now than people thought. If you're a money transmitter, and that means, you know, cryptocurrency exchange, and others, that turns you into a financial institution. That brings you under these bank secrecy act regulations. Those regulations already require financial institutions to report, just like this does, cash.

Starting point is 00:25:29 When I say cash, now I mean physical cash, if transactions involving more than $10,000 worth. Those regulations, and this is complicated, but they do not yet today include in the definition of cash, these digital assets. Not yet. Now, back in last December, there was new regulations proposed with the outgoing administration in the Treasury Department, and one of those was to alter the definition, not in the tax code, but under the Bank Secrecy Act, to include digital assets in that definition, thereby requiring financial institutions to report certain of these transactions. Now, what's important here is, people remember, there was. There was a lot of response to that.

Starting point is 00:26:16 There was initially an expedited period for public comment, got a lot of press, and there was some pushback, and eventually they extended that period, and those regulations are still pending. But at least during that time, you know, it was open to public review, and there were comments and criticisms of this measure in terms of what it would do, including for issues of privacy and record keeping, right? even for financial institutions that suddenly had to perform all of this verification and reporting of certain types of transactions. But here's the key thing. That new regulation hasn't been passed

Starting point is 00:26:47 yet. This provision, unlike that, unlike the Bank Secrecy Act stuff, which only applies to financial institutions, this applies to everybody, all businesses and anybody working in the course of their trade or business. And unlike even that regulatory process, it was put into a spending bill with no discussion. And this creates a felony for the rest of us. If this goes into effect, if this 60-50 amendment goes into effect, without the Treasury Department's Bank Secrecy Act regulations, we've extended to everybody, something that it's met with very serious concerns, even when applied to merely financial institutions. So that's an important but very complicated point to help explain how inappropriate this procedure was. Even if, you know, somebody says, hey, this is a good

Starting point is 00:27:37 idea. We need to do this. It's worth it to kind of cut down on tax sheets or whatever the ultimate justification is. We should be able to find agreement that this is not kind of procedurally the way to do something that is so important. The other reason it's so important to talk about the Bank Secrecy Act. Let's assume now that the Bank Secrecy Act catches up with this new felon. which applies to all of us. The only exceptions to this reporting requirement, and this is the case now under the cash one, is if that transaction is already being reported by a bank

Starting point is 00:28:14 or another financial institution. Okay. Why is that? Well, that's the goal. If they're reporting it, you and I don't have to. And this is why, in your course of your trade or business, you withdraw $50,000 in cash from a bank. That's the reason why you,

Starting point is 00:28:31 You don't have to report the transaction and including the information from the bank. Sounds absurd, right? Why would you have to do that? Well, it's because they're doing it for you. So what is the kind of fundamental structure and intent of this provision? It's to discourage the use of, before it was large amounts of cash, now is to discourage the use of digital assets. Why? Well, the government would like to track and observe and be able to account for these transatl.

Starting point is 00:29:01 So it discourages the use of peer-to-peer technology in two direct ways. The first thing is, hey, I don't want to take down your social security number, Laura, and be on the hook for all of this stuff. And I don't want to give it to you. You don't want to give it to me. So forget it. Why don't we just use a bank transfer? Okay.

Starting point is 00:29:22 That's the first instance. Like forget, you know, anything digital to begin with. Let's just go back to the complete legacy system. But the second thing is even if we want to kind of nominally. use digital assets. Why not funnel it through your bank? Why not use an existing financial institution and therefore they take the surveillance and reporting responsibilities and we don't. Now, maybe that's a good idea. And maybe digital assets, you know, it's just too costly in terms of compliance and all these law and order objectives. But we need to have that discussion,

Starting point is 00:29:54 right, because that very clearly is designed to eliminate the peer-to-peer feature of this technology. And yeah, some people may view that as purely something to be avoided, but a big decision like that should not be hidden and not analyzed and tucked into an infrastructure spending bill. Right. So in a moment, we're going to talk a little bit more about the government's kind of intentions here. But first a quick word from the sponsors who make this show possible. With Nodal Cash, you can earn crypto on your mobile device for free with no hardware to purchase.

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Starting point is 00:32:40 Like, do you think that they're actually trying to get people to use the banks as opposed to using these digital assets on a peer-to-peer fashion? Or do you think it's just the tax reason? Like, they just think people are avoiding taxes? Or what do you think is the real reason for this? Yeah, it's tough. And it's like, I don't want to speculate on kind of the mental states of the people who actually put this in too much. And that's one of the reasons why it's a problem, right? We don't have an explanation.

Starting point is 00:33:11 We don't have clarity on what the evil is that this is attempting to address. So people say, well, what would I propose? And I say, well, I don't even know what the problem is. It hasn't been stated. But it is fair to look at this structure of this 1984 law that's being. repurpose to do this. And that there it is clear that this is a crime fighting effort. And it's an attempt to go after starting in the 80s, in particular kind of drug money and money laundering and to discourage the use of cash. And that's that's very clear. And another point on

Starting point is 00:33:46 kind of how this is used in the past and present and why this is kind of so odd to treat this as as a tax provision. These forms 8300 that we've been talking about, these are used as in, in fighting crime. They're distributed to federal and state law enforcement agencies to help build cases, not about necessarily tax evasion, but about anything. Because, hey, who and why would somebody be having and holding this month's cash and it provides grounds to go investigate people? So we know that much about the history of this provision. Beyond that, look, there are absolutely legitimate and very serious questions about kind of peer-to-peer technologies, right, and the ability to do things without. But these deserve very serious discussion in an understanding of competing

Starting point is 00:34:38 values. And one thing we haven't talked about yet, and it's important to get clarity on what the law does before we turn to legal issues, is this is very problematic under our legal principles. And we have a Fourth Amendment, which protects us against unreasonable searches and seizures. And there's a whole history there about how the Bank Secrecy Act was upheld in the face of some of these challenges. But there's very serious differences here where, at least with banks, it's a third party that's put in this position and is reporting people's private financial information to the government for these various tax and other crime fighting purposes. But here, we're enlisting our neighbors and other Americans, other American businesses and saying it's our duty to report on them. And that's very different, right? It's different legally.

Starting point is 00:35:24 It's different in its impact on people. And it works to kind of undermine and intentionally so, I think, the technology that we're all kind of excited about. But there are very serious concerns about whether it's counterterrorism or tax enforcement, other crime fighting. But on the other hand, we've got a Fourth Amendment and we've got principles of privacy. And those need to be addressed in the open and not slid into. of spending bill. Yeah. And before we get more into the Bank Secrecy Act issues, I did want to just ask.

Starting point is 00:36:00 I did see Market Watch reported that supporters of this provision say that these reporting requirements are needed so the IRS can collect taxes that are owed to government and that this would just put crypto on the same playing field as cash. Do you agree with that? What's your response to that? Yeah, it's important to point out a few things. first of all, Form 8300, you're not reporting income. You're not reporting even revenue or anything.

Starting point is 00:36:28 It's just, yes, in some sense, it could expose people who are working in the cash economy who aren't already have their transactions tracked and traced by going through the banking system. But I'd love to see an explanation of how that actually works. In light of what we already know about the history of this provision, calling it on equal footing, there's something seductive about that. What's the best case for this scenario? If you're a lawmaker and presumably don't understand that much about digital assets and what is enabled by this whole realm of peer-to-peer technology,

Starting point is 00:37:06 there's one way of looking at this, looking at a Bitcoin, right, that you say, you know what, that Bitcoin has something in common with, you know, drug money, you know, wads of $100 bills. And that is one person can hand it off to another person and the IRS and Department of Justice might not hear about it, right? That's the argument. If you only see in digital asset technology, this element of what it accomplishes, you can see why. And you say, oh, wow, we've got this 1984 law and nobody really knows about it because it's accomplished its goal, right? People don't transact.

Starting point is 00:37:42 Why would we transact in wads of cash? it involves this legal burden and a risk of fines and so on, and me having to get your social security number. So it's, to the extent cash wasn't already on its way out. Yeah, of course, now it's the case. You're probably a criminal if you're using large amounts of cash because who else would do it? Who else would subject themselves to sharing their information and all of these risks of getting audited or even prosecuted under the law? So it's accomplished its goal in that sense.

Starting point is 00:38:12 I mean, that's the best you can come up with is, If you only see Bitcoin as an alternative to, you know, a suitcase full of cash, you can maybe see an argument for extending this. But there's a much bigger picture, obviously. So going back to the constitutional issues, Coin Center's director of research, Peter Van Valkenberg, believes that this provision is not constitutional in its original formulation, let alone in this. provision applied to cryptocurrencies. So can you explain why it might not be constitutional and how it's survived this long if it's not? Right. So again, we have to start with the cases that upheld the Bank Secrecy Act rules in the 1970s, which was really was a big development, right? And I think it's important

Starting point is 00:39:06 to look at this in the big, in the sweep of history. Banks have evolved over hundreds and hundreds of years to facilitate different things. And it's only really in 1970 that there, the government focused on them as kind of a middleman and a centerpiece of holding access to information that would serve the government's ends in crime fighting, money laundering, and tax evasion. So starting in 1970. And those were challenged in the Supreme Court's basis for saying that no, this doesn't, the bank sharing of this information does not violate people's kind of standard expectations of privacy as saying, hey, you've handed this information over to a bank and they're a third party and this is information that they record and you know that

Starting point is 00:39:49 they've got it. So if they share it with us, you can't complain under the Fourth Amendment. What's different, two things have happened since then. There are two themes that are important. The first is just to note how 60-50 I is very different, right? This is not about a bank. This is about you and me, right? This is a situation where I'm not going to ask you for your social security number and all of this personal information as a normal course of me getting this from you. And the government is both demanding that I collect it and then and then share that. So in other words, the third party doctrine, which is the basis for the Supreme Court's approval of these other collection techniques imposed on third parties like banks doesn't apply here. And the second is that even that

Starting point is 00:40:36 doctrine of third-party doctrine, has been getting additional scrutiny as it's expanded over the years. And I won't go too far into these more recent cases, but basically it's saying, hey, just because people share information with third parties doesn't necessarily mean that they no longer have a reasonable expectation of privacy. So those are the two themes which differentiate this, and especially when it's expanded to something like digital assets. So if this provision does get passed, which it looks like it probably will, what do you expect will happen? Wow, well, you know, it hasn't passed yet, and I'm not a parliamentarian or, you know, expert on kind of how these things go. So my first emphasis is, hey, this law hasn't been passed.

Starting point is 00:41:24 And once it's passed, it needs to be signed by the president. And until that's happened, people need to make their voices heard on it. So the first step, then if it's passed, would be to repeal it. But then as indicated by this discussion of Fourth Amendment, absolutely, there will be legal challenges. Yeah, I did see Coin Center saying it would be prepared. to make a constitutional challenge. So then for that to happen, does it just entail finding the right case to take to court? That's right. That's its own complicated endeavor, bringing a well-informed, well-considered legal challenge that allows the courts really to address the core issue.

Starting point is 00:42:04 And just actually going back to kind of the different use cases, or not use cases, but like ways in which this provision might be applied. So for something like a purchase of NFTs, would that, I guess like, you know, it goes back to what you were saying about how it's not clear for some of these transactions, how they're even taxable events. So the government is saying that this reporting is necessary to collect all the taxes that they're owed, then which of some of the different examples that we discussed are actually taxable events in which they would collect taxes from that transaction? Well, it's important to emphasize again, this really is not about that. So like in the broker provision, right, the separate thing that involved this debate, one of the things that they want from brokers is information about your cost basis, right? Things that are very relevant to calculating tax. That's not what's going on in this provision. Again, you might have zero tax consequences. It may lead them to say, oh, here's somebody with a bunch of cash. Let's investigate and see if they've been hiding more cash. But there's There's no direct connection.

Starting point is 00:43:14 There's nothing on the face of the form 8300. It's not even among the information there for you to explain what the tax consequences would be. So there's really nothing. Oh, that's fascinating. So I guess I don't fully understand. So the IRS requires form 8300 for cash transactions over $10,000. But do they ever collect taxes based on that information that they're provided? I'd have to look more closely, but I don't think the Form 8300 on its own ever would give information that directly determines a tax liability.

Starting point is 00:43:53 It will tell you that that business received $10,000. And then if that $10,000 isn't accounted for in the tax returns, it would give you someplace to look. But again, you're exactly right, Laura, this is an important point. It does not lead directly to any tax consequences. I mean, I guess so like going back to the NFT example, one, you know, way in which I could imagine it resulting in a taxable event would be if I create an NFT and then I sell it to you for more than $10,000, then that's earnings for me. So would that be an example? Yes. So you file this return as the, so you're the recipient of my digital assets in this example, right?

Starting point is 00:44:38 So you sell to me an NFT. I end up with an NFT. You end up with that money. Yes, the IRS could use it. But I don't think that's really how they do use it. Again, this is another reason why this provision is such an outlier in the tax code. It's really less about the recipient, which are typically, you know, businesses than it is about the payers. The IRS is looking for information about the, who are these people showing up and paying $15,000 in cash for a car or buying gold or something?

Starting point is 00:45:08 Or an NFT. Or now an NFT. The fair understanding of the purpose of this is less about the business, right, and more about the person sending cash or now digital assets to the business. Okay. So what do you think would be a better solution here to achieve the government's goals? Again, I want to kind of stay firm on this. I don't know what the government's goals are. We don't because they didn't announce it.

Starting point is 00:45:35 It wasn't discussed. There wasn't a committee report. They weren't an explanation of what this evil is. And that's important really for kind of gathering opposition to this. Even if people are saying, hey, you know, we need to be more careful or we could, who cares about the Fourth Amendment and who cares about financial privacy, those people could still say, well, at least we should discuss it. We should hear what those, those different concerns are.

Starting point is 00:45:59 So I don't, I don't know what the alleged danger really is. So I don't want to develop it too soon, except to acknowledge, yeah, these are. some very deep questions, which is why the technology is exciting. Unlike, you know, 50 years ago at the Bank Secrecy Act, banks and these financial institutions turned out to be a really useful choke point for the way the world has evolved since then. They've become really important in a ways that they weren't 100 years ago, but starting in 1970, they are. And as this technology opens up new possibilities for all kinds of things, and through peer-to-peer and as other features, that threatens that old order and a system for maintaining surveillance that the government's become very comfortable with.

Starting point is 00:46:46 That's a big issue. Sure. And it needs to be addressed. But we also have expectations of privacy. We have principles of autonomy. And we have a Fourth Amendment. And we have a general principle which says, hey, in this country, at least, you're free to do things without asking permission. And if the government wants to stop you, they need to explain what they're doing and justify. it, and certainly that's the case, if they want to attach a felony crime to something that today is completely legal, which is something enabled by a new technology. All right. Well, what do you think the crypto community should do to address this issue? Wow.

Starting point is 00:47:25 I mean, that's, I'm fighting for attention at this point, and if we get it, that's a good question. As we know, the vote in the House has been postponed several times. They're now saying it might happen as soon as the 31st. knows. But, you know, I wrote a report on this. You mentioned it for the proof of stake alliance. I urge people to look at it. And I tried to lay out the elements that we've been discussing to explain what this does. But I didn't try to list all of the terrible consequences because there's too many and there's too much uncertainty. But it applies, you know, to straightforward kind of Bitcoin transactions. It has special importance for this wild new world of NFTs. And

Starting point is 00:48:08 And we at least have to spend a minute on D5 for people to appreciate how potentially, and, you know, the text of the law could be effectively criminalizing things in a way that it may be impossible to comply with, right? Because this 1984 law just doesn't make sense. So as to what people should do is read the report, read the statute, read the information available on it, and ask these questions, questions that its sponsors in Congress did not ask, did not ask Treasury to explain. and start exposing the consequences to it in whatever way it works. And hopefully there's, look, we definitely are starting to get attention on Capitol Hill.

Starting point is 00:48:51 The fact that the vote in the Senate went through so quickly, you know, kind of made it much more difficult to get people to dig into this. But I think it's starting to happen. So 60-50 I, that last digit on the 60-15, it's not a one, it's an I. let's get it to trend and get people to ask why this wasn't considered more carefully. All right. Great. Well, where can people learn more about you and 60-50I? Well, as of this event or this issue, I'm now on Twitter at Abe Sutherland. You can find links there. Please look up the Proof-of-Stake Alliance. Look up 60-50I, download, and read that report.

Starting point is 00:49:31 And try and ask those questions about how this will apply. and yeah, start with the report. Perfect. Well, thank you so much for coming on Unchained. Thanks, Laura. Thanks so much for joining us today. To learn more about Abe and 6050I, check out the show notes for this episode.

Starting point is 00:49:48 Unchained is produced by me, Laura Shin, with help from Anthony Yun, Daniel Nuss, and Mark Murdoch. Thanks for listening.

Unchained - Not Reporting Info on Some Transaction Partners Could Soon Be a Felony - Ep.284

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