Two victories in our fight against unconstitutional financial surveillance.
We won an appeal of the dismissal of our 6050I lawsuit and the draft IRS broker reporting forms no longer include software devs.
Today we’re happy to share two incremental but important victories in our fight to protect the rights of cryptocurrency developers and users. First, Coin Center has won an important appeal in our ongoing challenge to the 6050I reporting scheme that would require anyone receiving more than $10,000 in crypto to collect and report personal information to the IRS without a warrant. Second, the IRS has released a new draft tax reporting form for cryptocurrency brokers that removes the “unhosted wallet provider” designation over which we protested in our regulatory comment last fall.
Victory on Appeal
In our 6050I case against the Treasury Department, we and our co-plaintiffs won our appeal to the Sixth Circuit. Our appeal was challenging the district court’s dismissal of our case on standing and ripeness grounds. This means we will now return to the district court to argue the merits of our claim: that 6050I cash and coin reporting, as extended to crypto transactions over $10,000, violates the First and Fourth Amendment rights of those obligated to report, and that the statute exceeds the enumerated powers of Congress.
“Standing” is a judicial doctrine intended to prevent lawsuits by improper parties; it demands that any person challenging a law must actually be injured by that law in a way that can be addressed by the court. The Court of Appeals ruled in our favor unequivocally on standing, holding that “the very disclosure of the information required by § 6050I is injurious, and because plaintiffs have pleaded they will have to make the disclosures, they have suffered an injury in fact as the direct objects of the action at issue.”
Standing has proven to be a tricky obstacle for civil libertarian challengers of overbroad surveillance regimes in the past. For example, in California Bankers Association v. Shultz the ACLU claim against Bank Secrecy Act (BSA) surveillance requirements was dropped from the lawsuit because they could not show that any of their members were subject to BSA reporting. We were careful to learn from that history and meticulously describe why we will indeed be subject to the law and therefore injured by its overbroad and unconstitutional surveillance obligations. As the court held in our appeal:
[W]ith respect to the ACLU’s First Amendment challenge, the organization lacked standing only because the ACLU failed to plead facts that suggested that it would be subject to the reporting requirements… Plaintiffs allege here that they will be subject to § 6050I and that those forced disclosures will harm them.
The court also had to decide whether our challenge was “ripe.” “Ripeness” is another judicial doctrine that demands that challenges only be brought when the law and facts are sufficiently developed to allow the court to rule. This has been complicated in our 6050I lawsuit because the IRS has been recalcitrant in implementing the law as passed by Congress, even suggesting during oral argument that it can delay implementation indefinitely (effectively ignoring the explicit will of the legislature). That kind of uncertainty is a direct tax on good faith users of crypto who simply want to know their obligations, comply with the law, and avoid felony criminal liability for failure to report. As we wrote last January, the law went into effect for the 2024 tax year even though the IRS has failed to issue any guidance or reporting forms to enable folks to comply and then announced an enforcement delay.
Even worse, the IRS argued in our case that their own failure to offer timely guidance meant that our lawsuit was not yet ripe to be heard and that it could only be heard if and when they finally offered that long-awaited guidance. But the court of appeals, again, ruled in our favor, holding that our First Amendment, Fourth Amendment, and Enumerated Powers claims were all ripe to be heard now, irrespective of any potential future guidance or rulemakings from the IRS. Particularly regarding our First Amendment claim, the court’s opinion on ripeness clearly articulates why our arguments should be heard now: because as we allege, the 6050I “reporting mandate will directly mandate the reporting of expressive associations.” The privacy of those associations, the names and personal information of Americans who support our mission through donations is our constitutional right, and we’re excited to move forward defending that right on the merits.
Broker Reporting
A second blow struck against financial surveillance overreach this week is a new draft third party reporting form from the IRS. This is another volley in our ongoing fight against the IRS’s extralegal and unconstitutional attempt to treat noncustodial entities like software developers as brokers for purposes of third party tax reporting. As we wrote last July,
Almost three years after Congress passed the Infrastructure Act and at least six years since our calls for third-party reporting guidance began, the IRS published a final rule offering guidance for custodial exchanges. And what about the question of non-custodial entities? They punted:
“The proposed new digital asset middleman rules that apply to non-custodial industry participants are not being finalized with these final regulations. The Treasury Department and the IRS continue to study this area and, after full consideration of all comments received, intend to expeditiously issue separate final regulations describing information reporting rules for non-custodial industry participants.”
After six years the IRS has finally, thankfully, offered custodial exchanges guidance on third-party reporting. We’ll just have to wait some more to see how and when they deal with the question of non-custodial entities.
Earlier this year the IRS had published a draft form with an “unhosted wallet provider” check-box in the section describing “broker type.” We’re happy that the newly released draft form has no such checkbox, indicating that (at least for now) the IRS is backing down on trying to collect surveillance reports from mere software developers and other noncustodial entities. We must continue to be vigilant in ensuring that no such unconstitutional surveillance obligations are ever implemented, but between this change to the reporting form and the vindication of our lawsuit by the Sixth Circuit we’re optimistic that we can win this fight.