The IRS has proposed an unprecedented collection of data on crypto users

For two years, the cryptocurrency world has been waiting to see how the Internal Revenue Service (IRS) will implement the Infrastructure Investment and Jobs Act. Simply put, this legislation establishes a ban on cryptocurrency mining and new reporting requirements that expose millions of Americans to new serious crimes. The good news is that the IRS's nearly 300-page proposal isn't as bad as it could be under the law. However, this is far from a good policy.

As citizens, companies and consultants finish drafting their letters of recommendation before the Oct. 30 response deadline, it's important to take a step back and consider why businesses aren't required to report their customers to the government by default.

Looking back to 2021, the Infrastructure Investment and Jobs Act was about roads, bridges and the like — not about cryptocurrency or financial reporting. It wasn't until funding became so necessary to offset spending that members of Congress slipped through two provisions to increase financial oversight of cryptocurrency users. Their argument is that increased surveillance will increase tax revenue, effectively prosecuting cryptocurrency users for tax evasion.

Related: New tax rules could mean US immigration for crypto companies

At the time, the Joint Committee on Taxation estimated that the provisions would raise nearly $28 billion in tax revenue over 10 years. Without a way to replace the money, attempts to remove the controversial reporting requirements were ultimately rejected.

The $28 billion figure was questionable at the time. And less than a year later, the Biden administration has released a budget with a very different outlook. In contrast to the $28 billion estimated by the Joint Committee on Taxation, the Biden administration estimated that only $2 billion would be available over the next 10 years. And now, Treasury officials admit that the estimates are based on a very different market, so even that number may be an overestimate.

Expense reimbursements left out the window appear to be more than another brick in the wall of US financial oversight.

The IRS proposal, again, doesn't seem as bad as it could be because the proposal temporarily excludes miners and some software developers. Again, the proposal chooses a way to determine who should report clients.

The premise appears to be based in part on whether “one can learn information about the customer's identity, or whether one knows this information.” The proposal states that this distinction is made because some platforms “have a policy of not requesting customer information or only requesting limited information.” [but] They have the ability to get information about their customers by updating their protocols. Because of this, the proposal states that the IRS would expect some decentralized exchanges and self-hosted wallets to be required to report their customers' personal information.

The IRS reports that it has received 1,726 comments so far.

Those are the starting numbers.

Unless you want to:

– Every crypto site and wallet to have your SSN

– Nodes, devs, management and LPs to broker in technical non-compliance;

Take 2 minutes to use @LeXpunK_Army's comment tool pic.twitter.com/1d8ijWbjVG

— CryptoTaxGuy.ETH ⌐◨-◨ ️ (@CryptoTaxGuyETH) October 17, 2023

In other words, even though businesses may have no reason to collect sensitive personal information from customers, the baseline the IRS is working with is whether we have the ability to do so. That may be somewhat limited since the focus is on businesses providing services, but “ability to collect information” doesn't seem to be more than just “collection by default.”

In this case, this approach should come as little surprise. The US government has been gradually developing broader financial reporting requirements with the Bank Secrecy Act, the PATRIOT Act and many other laws and regulations. The provisions in the Infrastructure Investment and Jobs Act and the resulting proposal from the IRS are the latest iterations of this broad framework.

Related: Prepare for Incompetent IRS Agents in 2023

But instead of expanding the scope and depth of financial surveillance, it's time to question the whole issue. In a country where Americans are protected by the Fourth Amendment, businesses should not be forced to report their customers to the government by default. Activities such as using cryptocurrency for payment, receiving more than $600 via PayPal after a garage sale, or cashing a check from work should not put you on a government database.

Getting out of this surveillance state may require fundamental changes in US law, but that doesn't mean it's a radical idea. In a Cato Institute survey, 79 percent of Americans said it was unreasonable for banks to share financial information with the government, and 83 percent said the government needed a warrant to obtain financial information.

These are the principles that should guide the discussion going forward. So even as the Oct. 30 response deadline looms, commenters must weigh both what the proposal does and what it doesn't say.

Also, while the current focus is on the IRS, let's not forget that the responsibility for fixing the current situation and the larger financial oversight situation lies in the halls of Congress. At the end of the day, the IRS is doing what Congress told it to do. So it is Congress that needs to step in to reform the system as a whole.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.