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3) The bill, originally, would create tax reporting requirements for "any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets.” They would have to send reports on US users' activity to the IRS.

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4) The goal, roughly, is to get crypto exchanges* to send info to the IRS so it knows if an American made money trading crypto and can tax it. *I'm using 'exchange' here in the crypto sense, as a full-stack product; the equivalent in other industries here is really the broker.

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5) Let me start by saying that, as the owner of a US crypto exchange that servers Americans (ftx.us), I think it's totally reasonable to apply this to trades on FTX US. Crypto taxes are sometimes underreported, and we're happy to work with regulators on this.

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6) (There are some potential hairy issues around deposits/withdrawals that complicate tax basis reporting; more on that later.) There are some trickier issues here around non-US exchanges--does this apply to them? Let's put that aside for now.

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7) The really messy part comes when you look at DeFi. This language applies to any person who: a) provides services "effectuating transfers of digital assets" b) gets paid for it Who does that apply to?

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8) Well, certainly FTX US, and Coinbase. But.... how about an ETH miner? They mine a block, include 3rd party transactions, and add it to the blockchain. That block might contain a trade on a DEX between 2 parties. Is the ETH miner "effectuating a transfer of digital assets"?

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9) It sorta seems like it might be! And it is getting rewards for mining the block--there's the consideration. So as phrased, it's broad enough that it could include miners, stakers, noncustodial wallets, etc.

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10) But the miners aren't really the ones responsible for the trade. They're just dutifully including whatever (possibly even encrypted or unparseable!) transactions they're told to. In the equities/broker realm, this is sort of the equivalent of the ISP (e.g. Comcast).

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11) They're not specifically running an exchange or broker--they're just passing on and formalizing all the information in the network, a bit of which might happen to be trading related.

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12) The impact of requiring centralized US exchanges to report is that taxable gains get reported to the IRS. The impact of requiring miners to report is... Well they probably _couldn't_ even do it. It won't increase tax; it'll just kill industry, or offshore it.

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13) And, in fact, on most blockchains everything is public. So if you wanted tax reporting from it, an independent company would be just as well equipped as the blockchain infrastructure providers. Autonomous smart contracts, on the other hand, can't understand questions.

11:26 PM · Aug 5, 2021Twitter Web App

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14) Now, there are still unresolved questions. Sure, the miners shouldn't be the ones reporting blockchain-based tax, but who _should_? How _do_ tax reporting and DEXes interface? I don't know! It's a complicated question. But miners aren't the answer.

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15) So, what happened? Well, a *lot* of feedback of this sort has been given to the Senate, and there are revised versions begin considered.

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16) In particular, versions clarifying that the people solely doing the following don't count: a) "validating distributed ledger transactions" b) "selling hardware or software for which the sole function is to permit a person to control private keys"

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17) c) "developing digital assets or their corresponding protocols for use by other persons" Essentially, the amendment would clarify that building DeFi or blockchain products isn't like being a centralized broker, and wouldn't have to try to find and report on-chain trades.

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18) This amendment successfully clarifies the largest issues, and guides the bill towards the straightforward targets for reporting: centralized US crypto exchanges.

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19) This amendment is *really* important: it is the difference between a reasonable bill that will probably reduce tax underreporting, and one that could cripple industries while failing to raise more tax.

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20) Regulation is coming to crypto, and in some cases has long since come. We're excited to work with regulators to build out frameworks to accomplish their goals; to act as a reference if helpful; and to help give color on how provisions would fit in the industry.

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21) ---------------- An addendum: what's up with your crypto tax basis? Normally, you'd expect a report from FTX like: " 1) Bob buys 10 BTC @ $10,000 each 2) Bob sells 10 BTC @ $12,000 each " In that case, Bob would likely have $20,000 of taxable profit.

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22) But in crypto, you might instead get the following from an exchange: " 1) Bob deposits 10 BTC 2) Bob sells 10 BTC @ $12,000 each " So, Bob sold his BTC for $12k. What was the tax basis of it? How much did Bob make (or lose)?

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23) Well the _real_ answer is, "we don't know". Bob sold his BTC on FTX, but he didn't buy it there! He bought it somewhere else, and then transferred it, on the blockchain, to FTX. FTX has to calculate a taxable income but doesn't all the necessary information to.

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24) You could try to take the price of BTC at the time Bob deposited, but that probably wasn't really when he bought it. Maybe he bought it in 2017 for $4,000 each! Blockchain transfers make it so that each exchange isn't an isolate set of trading; they interact.

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25) So to *really* know Bob's tax basis (or profit, or tax), you'd need to combine his records from *all* exchanges together: Coinbase: 1) Bob buys 10 BTC @ $9k each 2) Bob withdraws 10 BTC FTX: 3) Bob deposits 10 BTC 4) Bob sells 10 BTC @ $12k each --> $30k profit.

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