Coinbase's Chief Legal Officer Warns Crypto Tax Could Set A 'Dangerous Precedent For Surveillance'

Paul Grewal, the chief legal officer of Coinbase, one of the world's largest crypto exchange platforms by trading volume, warned about the danger of crypto tax and said that it could set a "dangerous precedent for surveillance" of consumers' daily financial activities.

Grewal, who previously worked as the vice president and deputy general counsel at Facebook, shared his opposition to the U.S. Department of Treasury's proposed regulations for reporting tax of cryptocurrencies, highlighting the potential harm not only to innovation in the nascent industry but also to fairness.

In a series of posts on social media platform X, the Coinbase chief legal officer urged those who care about innovation and fitness to join him in opposing the regulations.

"Everyone who cares about fairness and supports American innovation should chime in on Treasury's proposed regulations for tax reporting of digital assets. You can join @StandwithCrypto's opposition to the rulemaking here," the American lawyer posted along with a link.

Grewal also expressed his concern that establishing crypto tax reporting rules could put digital assets at a disadvantage, especially since the industry is just getting started.

"At their core, the proposed regs go well beyond the congressional mandate to establish tax reporting rules on par with those for traditional finance, putting digital assets at a disadvantage and threatening to harm a nascent industry when it's just getting started," he said.

Moreover, the Coinbase CLO noted that the rules could be a model for the government to keep track of consumers' daily financial activities since the proposed regulations require the reporting of nearly every cryptocurrency transaction, adding that this has no legal public purpose and even threatens to give more burden to startups in the industry.

"The rules would also set a dangerous precedent for surveillance of the everyday financial activities of consumers by requiring nearly every digital asset transaction - even the purchase of a cup of coffee - to be reported," Grewal's post read.

"Collection of such data has no legitimate public purpose and threatens to overburden Web3 startups with costly requirements and the IRS with more data than they can ingest and analyze," the lawyer further said.

The U.S. Treasury earlier said that "the reasons for requiring information reporting on dispositions of digital assets do not depend on the manner by which a business operating a platform affects customers' transactions."

U.S. Senators Bernie Sanders and Elizabeth Warren had expressed their concerns about the delay in the implementation of tax reporting requirements, particularly for crypto brokers. Both underlined the need to bridge the crypto tax gap, so the industry could align with other financial sectors when it comes to tax reporting.

But this proposal has been met with fierce resistance, particularly those within the crypto space.

In August, the U.S. Treasury Department released proposed rules that would require exchanges and brokers to file a report on certain crypto sales, including Bitcoin, NFTs and others, to close the tax gap and "ensure that everyone plays by the same set of rules."