Last-Minute Cryptocurrency Taxation Is Not the Way Forward for Infrastructure
Another problem for the cryptocurrency industry has been discovered deep within the infrastructure bill’s 2,700 pages and it might be even more disastrous than the broker provision.
It has been nearly a month since the cryptocurrency industry rallied around the Senate to stop the infrastructure bill. Now again, the bill is at a standstill. Although the current standstill is due to questions surrounding the debt ceiling, it could not have come at a more appropriate time: another problem for the cryptocurrency industry has been discovered deep within the bill’s 2,700 pages, and it might be even more disastrous than the broker provision.
A Quick Recap of the Broker Provision
First, let's review why the broker provision was under the spotlight last month. To fund the infrastructure bill, lawmakers identified the cryptocurrency industry as a possible source of tax revenue. The plan boiled down to a mandate (page 2,419 of the bill) that would require traditional brokers (i.e., Coinbase or Kraken), miners, and software developers to report personal information of those involved in cryptocurrency transactions. The Joint Committee on Taxation estimated that such reporting would yield $28 billion in tax revenue over ten years.
While taxes alone are certainly enough to get worked up about, the issue with the broker provision is much deeper than that. At the core of the provision lies an impossible task: Congress would be mandating the cryptocurrency industry to report information that is not available to all its members equally. In fact, for some, accessing the required information is not only infeasible, but impossible. In effect, the provision would set a de facto ban on routine activities (e.g., mining).
Despite valiant efforts by a number of Senators and an unprecedented rallying of the industry to amend the language, the bill was ultimately pushed forward to the House of Representatives without any changes.
Section 6050I: Another Impossible Task
Unfortunately, while many were preparing to tackle the broker provision once the bill becomes law, another concerning piece of the infrastructure bill was uncovered: the bill amends section 6050I of the U.S. tax code to include digital assets. As it currently stands, section 6050I requires a business that receives more than $10,000 in cash to report the transaction to the federal government within 15 days. The report needs to include the name, address, and taxpayer identification number (i.e., social security number) of the payer (more on the fundamental issues with this in a future blog post).
Like with the broker provision, legislators have once again failed to understand what makes cryptocurrencies unique. While many people make the mistake of thinking cryptocurrencies are absolutely anonymous, it seems Congress has made the mistake of thinking there is zero anonymity. Otherwise, they would know such reporting—reporting that even traditional banks have trouble with—will be impossible for many actors in the industry.
Dry Ink Shouldn’t Seal a Bad Deal
The cryptocurrency industry is in need of regulatory guidance, but that does not mean the industry needs regulations just for the sake of having regulations. As Senator Cynthia Lummis (R-WY) put it, “This is why we need a real committee process to consider these issues, instead of secret drafting. We’re working on making it better.” Abraham Sutherland, of the Proof of Stake Alliance, echoed a similar sentiment when he said, “A statute creating felony crimes for users of digital assets should be debated openly, not quietly inserted into a spending bill.”
Both Lummis and Sutherland are right. For a government that has never been trusted less by the public in American history, this type of conduct will earn it no favors.
There is no overstating that the problems surrounding the cryptocurrency provisions in the infrastructure bill are not about taxes. In fact, taxes on cryptocurrencies might even be beneficial for the industry. As Sheila Warren described, “taxation is a gateway drug for getting legitimacy.” Burgeoning industries have often sought taxes as a way to pave the way for government acceptance. So while it’s easy to discount objections as solely being in opposition to taxes themselves, the problem here is much greater.
The real problem at hand is how legislators have tried to create a new tax framework through a last-minute provision within a must-pass bill. In doing so, they created a host of problems that could have been avoided if a more traditional route was taken. Worse yet, regardless of the industry, the process itself has paved the way for future legislators to do the same.
There may be no escaping the provision at this point in time, but legislators would be wise to work with the industry to craft a brighter future. The mass exodus of miners after China’s crypto-crackdown is evidence enough that this is an industry that will vote with its feet. If the United States continues down this path of intolerance for cryptocurrencies, it might soon learn firsthand what that exodus looks like.
For an excellent report on the effect of both the broker and tax supervisory provisions, I highly suggest reading Abraham Sutherland’s research report here.