Amanda Andrade-Rhoades/AP Photo
Treasury Secretary Janet Yellen testifies before the House Financial Services Committee at the Capitol in Washington, June 13, 2023.
The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
One of the more surprising episodes during the Infrastructure Investment and Jobs Act saga in late 2021 was the revelation of the cryptocurrency industry’s political might. When Washington lawmakers decided to crack down on the industry’s rampant tax evasion to raise revenue for the $550 billion bill, they were met by a serious lobbying push from what was then a nascent political force.
The crackdown simply extended standard tax reporting requirements to an industry designed to operate in regulatory shadows. The first part of the proposal mandates businesses that receive any crypto payments valued at $10,000 or more to report to the Internal Revenue Service (IRS). The second part, which spurred the industry’s lobbying campaign, defines key players in the industry as brokers, requiring them to furnish customers and the IRS with necessary tax reporting forms. The final provision specifies the use of basis to determine the starting point value of reported crypto transactions, which would help calculate any gains or losses.
These three revisions to the Internal Revenue code could significantly tackle a serious underreporting problem and bridge the tax gap (the difference between legally owed tax and what is actually collected), which former IRS Commissioner Charles Rettig noted “possibly exceed[s] $1 trillion” on an annual basis. Experts at the New York University Tax Law Center believe the changes would make it easier for taxpayers to meet their tax obligations and also allow the IRS to focus more squarely on tax cheats who may have been pouring more resources into the crypto sector due to the more favorable tax conditions. What’s more, the Joint Committee on Taxation (JCT) estimated that these reporting changes could net over $28 billion through 2031.
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Despite this, Janet Yellen’s Treasury Department has yet to formalize the regulations that would usher in this new reporting regime. The initial expectation was to have Treasury provide the new guidance by the end of 2022, allowing reporting changes to begin with transactions completed in 2023. However, despite approval of the proposed regulations by the Office of Information and Regulatory Affairs in February (the usual stumbling block in this sort of proceeding), the department has yet to publish the regulations.
Now, considering that Treasury may be wary of kick-starting a new reporting regime midyear and the nature of rulemaking—proposed regulations go through a 60-to-90-day public comment period which is then reviewed before final rules are published—it seems likely that implementation will be delayed another year.
Real money is at stake here even over the short term. Delaying publication of the new regulations for an additional year risks up to $1.5 billion in revenues, according to JCT estimates. Other analyses such as a Barclays research note released last year estimate that crypto investors are not paying at least half of their owed taxes. According to the investment bank’s calculations, the digital asset tax gap sits around $50 billion per year, which would account for close to 10 percent of all unpaid taxes.
Treasury’s dithering is a win for tax cheats and the crypto industry, which mobilized to prevent Congress from enacting this legislation. Although the industry’s lobbyists failed in their quest to strip out the reporting requirements, they managed to revise language that would have targeted any “decentralized exchange or peer-to-peer marketplace” to one that defines brokers as anyone “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The goal of this revision was to ensure miners and other background operators were exempt from reporting requirements. And now thanks to Treasury inaction, the industry’s wish for all actors to be exempt will remain the de facto reality.
Yellen’s indifference toward regulatory vigor extends beyond cryptocurrency enforcement. Take for example her comments in June welcoming bank consolidation: “Certainly in this environment, some banks are experiencing pressure on earnings and there is a motivation to see some consolidation.” Just a month before that statement, she said regulators would be “open” to more mergers if they came through. In a similar vein, her pick to lead the Office of the Comptroller of the Currency, Michael Hsu, vowed that his agency would be receptive to merger proposals.
This embrace of bank consolidation contradicts the Biden administration’s position on competition policy, placing Yellen in alignment with the Chamber of Commerce and on a different path from trustbuster Jonathan Kanter, who has publicly promised to reverse any bank merger approvals if they are in violation of antitrust laws.
Climate policy is another area where Yellen’s inaction is a real cause for concern. Early in her tenure, she signaled a commitment to a light-touch regulatory approach by the Financial Stability Oversight Council, stating that she saw FSOC’s role more as a convener of regulators responsible for assessing risks from climate change. She also shared an unwillingness to push financial institutions to shift capital away from risky, climate-destroying fossil fuel investments. In fact, FSOC’s report on climate-related financial risk failed to mention fossil fuels as the key driver of climate risk or even provide specific policy recommendations for the climate crisis beyond disclosing and assessing risk.
Even within her immediate scope of influence, Yellen’s climate-related actions have been disappointing. She appointed John Morton, a serial traveler through the revolving door between government and industry, to head the Treasury Department’s climate hub. Morton has since returned to the private sector after a 20-month tenure that seemingly brought no real advancement in the fight against climate change. One would expect that almost two years in the job would at least yield a detailed agenda on how the department plans to address the climate crisis and the risks posed to the financial system.
As long as sloth remains a defining theme at the Treasury Department, various industries will continue to exploit the nation’s laws and people. For far too long, financial institutions have subverted the rule of law while deepening their influence in American society. There is absolutely no reason to extend this privilege to the crypto industry. It’s high time Janet Yellen recognizes regulation as a key part of her responsibilities and starts taking action.
