Coin Center Files Lawsuit Against US Treasury Challenging Enforcement of Amendment to Section 6050I Under the 2021 Jobs Act
Lawsuit challenges mandatory KYC digital asset reporting requirements for individual and business transactions of $10,000 or more.
Introduction: The Amendment and its Potential Impact
On June 10, 2023, Coin Center filed a lawsuit against the United States Treasury charging that enforcement of amendments to 26 U.S.C. §6050I relating to digital asset transactions signed into law under the 2021 Jobs Act are unconstitutional. The lawsuit opens with a background discussion of 26 U.S.C. §6050I, which was instituted in 1984 and mandates certain participants in trades or businesses to report transactions exceeding $10,000 in cash to the federal government. This law has traditionally pertained to physical cash, coins, or cashier's checks in a few circumstances.
The Context: Understanding the Traditional 26 U.S.C. §6050I
The term "trade or business" is defined as a regular profit-seeking activity, excluding hobbies, amusement diversions, or sporadic activities. The differentiation between a trade or business versus a diversion, hobby, or sporadic activity relies on a nine-factor test that considers categories like elements of personal pleasure, expertise, and expected appreciation in the value of assets.
The Amendment: Unveiling Changes to 26 U.S.C. §6050I
The 2021 Infrastructure Investment and Jobs Act altered the definition of "cash" in §6050I to incorporate "digital assets," effectively encompassing Bitcoin and similar cryptocurrencies that use cryptographically secured distributed ledgers. This expansion has implications for the landscape of transactions that may fall under the §6050I reporting requirement.
The amendment to 26 U.S.C. §6050I was introduced during the legislative process of the $1.2 trillion Infrastructure Investment and Jobs Act of 2021. Added as a tax revenue provision without explicit justification or explanation, the amendment expands the definition of "cash" in §6050I to include "any digital asset."
A "digital asset" is defined as "any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary." This broad definition brings digital assets, like cryptocurrencies, under the purview of §6050I's statutory and regulatory regime that previously only applied to physical cash.
New Challenges: The Impact of the Amendment on Cryptocurrency Users
If this amendment is enforced, transactions involving digital assets would be subjected to §6050I’s requirements necessitating participants to disclose comprehensive and sensitive information to the federal government. The sender will need to disclose personal information such as their Social Security number, name, and address to the receiver, who will then include these details in the government report.
In addition, the receiver will need to disclose their personal information to the government, as well as the quantity of digital assets received, the date of the transaction, and the nature of the transaction. They will also be required to disclose any additional information mandated by Form 8300, the IRS's template for all reports, which may include identifying information about any third party on behalf of whom the sender acted.
Finally, the receiver will need to verify the identity of the sender, which may involve examining the sender's passport, driver's license, or similar documentation. This requirement further emphasizes the significance of the amendment in terms of data privacy and compliance burden.
Privacy Concerns: The Widespread Surveillance Consequence
Plaintiffs allege that this amendment will force every sender and receiver involved in a covered transaction to comply with a comprehensive reporting process, requiring both parties to maintain transaction records and submit reports to the federal government. This process would allow the government to identify individuals involved in transactions by associating them with their public ledger addresses and potentially uncover other unrelated activities of these individuals. For example, from a single report, the government could discover personal information about an individual's donations, payments for services, or contributions to political causes.
The complaint further notes that widespread surveillance enabled by the amended rule would subject all cryptocurrency users who engage in a single covered transaction to this process. Such disclosure would paint a detailed picture of an individual's transaction history, revealing intimate details of their life. This can be accomplished without a warrant or probable cause.
The rule would also affect those involved in transactions totaling over $10,000, even if these transactions were small payments to many individuals. Participants would have to provide identification, a challenging requirement given the global and often anonymous nature of cryptocurrency transactions. Reports submitted could be shared with multiple law enforcement agencies, further eroding privacy.
As a result of this amendment, cryptocurrency users would be compelled to reveal significant private information, even in activities where they had taken steps to maintain privacy. These requirements might deter some from engaging in cryptocurrency transactions altogether, even though these transactions remain legal.
Legal Repercussions: The Threat of Severe Penalties
Enforcement of the rule is backed by severe criminal and civil penalties, including felony charges for willful violations, fines for failure to submit reports or providing incorrect reports, and penalties for attempting to evade reporting requirements. Civil penalties for violations must be partially paid before they can be challenged.
The Legal Battle: Coin Center's Lawsuit
Plaintiffs demand damages and attorney fees as sell as a “declaration that the amended §6050I is facially unconstitutional” and an “injunction preventing the Defendants from enforcing the amended §6050I.”
Conclusion: The Future of Privacy in Cryptocurrency Transactions
The implications of the amendments to Section 6050I are profound and potentially threatening to the privacy and freedom of cryptocurrency users. The broad and intrusive measures could potentially expose a vast array of personal information to government scrutiny, effectively eliminating the anonymity and privacy intrinsic to the blockchain technology.