An update on our Tornado Cash lawsuit, the long awaited broker rule, and crypto taxation
August is supposed to be a quiet time with Congress out on recess, but the last couple years have broken that rule and this time was no different.
There were several developments related to Tornado Cash. The first is that the lawsuit sponsored by Coinbase and filed by several users of Tornado Cash (which parallels our own case) was dismissed by the court, and this fact was brought to the attention of the court in our case by the government.
We believe our case is substantially different and remains in a strong position despite that dismissal.
The next Tornado Cash development was the DOJ’s indictment of the protocol’s developers. We responded in a blog post analyzing the charges and find that they come dangerously close to criminalizing the publication of software code, and that they run counter to explicit guidance from FinCEN that anonymizing software providers are not money transmitters subject to Bank Secrecy Act obligations. I encourage you to read the whole post.
Subsequently, Cravath published a legal analysis that mirrors and concurs with our analysis that is also worth reading.
Lastly on Tornado Cash, in the course of his research, Peter Van Valkenburgh came across an OFAC-sanctions-related case (KindHearts v. Geithner) that may present a legal argument for those persons who have funds trapped at the sanctions Tornado Cash smart contracts to argue that they are subject an unconstitutional seizure.
Moving on from Tornado Cash, the Treasury Department and the IRS finally initiated a long awaited rule making to implement the crypto tax reporting provisions in the bipartisan infrastructure bill passed in November 2021.
This includes regulatory interpretations of who qualifies as a “broker” obligated to do information reporting on their ‘customers’ to the IRS and what the content of those reports will be, etc. Coin Center will file comments and participate at the hearing. Stay tuned for further analysis.
Finally, and also related to tax, we sent a comment letter in response to the information request by Senators Wyden and Crapo on digital asset taxation that I’ve previously mentioned here. Among other things, we stressed the importance of clarity, the need for a de minimis exemption from capital gains taxation, and that cryptocurrency block rewards from mining or staking on cryptocurrency networks should not be taxed as income when they are created.
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