The US Senate just passed a landmark $1.2 trillion infrastructure bill, which includes $550 billion in new spending. Initially, the bill was to be partially funded by increasing the power of the IRS to go after individual and corporate tax dodgers. That increased tax enforcement would have yielded an estimated $100 billion in tax revenues. Congressional republicans opposed this bolstering of tax enforcement mechanisms. Instead of capturing more of the taxes that are owed to the government, those behind the infrastructure bill decided to go after crypto.
Specifically, the bill aims to collect $28 billion from the cryptocurrency industry over the course of 10 years. Although this figure is much lower than the $100 billion in tax revenues that will continue to go uncollected, it represents a sizable chunk of the revenues expected to be generated by the bill. As written, the bill evidences little to no understanding of how the emerging digital assets economy actually operates.
According to CNBC News:
The provision would require crypto "brokers" to report specific information about crypto transactions, like price points from when users bought in and sold. This would be in addition to reporting transactions of more than $10,000 to the Internal Revenue Service (IRS), which is already mandated.
The provision’s definition of a "broker," however, has sparked concern within the crypto community. Currently, the bill defines a "broker" as "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."
Fears of Overreach
The language involving "brokers" in the bill is frighteningly broad. There was an effort made by Treasury Secretary Janet Yellen and others to amend this language, but the amendment failed. As it stands, several types of actors in the crypto economy may soon face onerous or impossible reporting requirements. Technically, a team that provides custodial wallets could be subject to the new requirements. So could miners. And DeFi contract developers.
Transactions in excess of $10,000, whether denominated in crypto or fiat, are already subject to strict tax reporting requirements in the US. Traditional forms of tax evasion dwarf any potential revenues that could be generated from crypto by the new bill. Some of the parties potentially subject to the new requirements don't even technically have access to the information they'll be required to report. It's as if the government is attempting to overreach in a crypto cash grab, but it doesn't even know enough about the technology to make its attempted cash grab appear serious.
It isn't entirely clear what mechanisms the government will use to coerce compliance with the new regulations. Nor is it clear how most companies operating in the crypto economy will interpret the language in the infrastructure bill. Some companies, particularly larger ones, may simply leave the country. Others will probably fight for their right to operate without impossible reporting requirements in court. Others still may ignore the new rules altogether.
Exchanges already keep good records and report to the IRS when necessary. Miners in the US are already required to report their income to the government. So is anyone earning income through trading or staking. This new regulation, due largely to how vague it is, may or may not impact these parties. But it will definitely impact the thousands of small businesses now attempting to find a niche in the crypto economy. It may even have a chilling effect on growth, though this seems likely to be short lived given the sector's broader trend of expansion.