The recent struggle to sign a new infrastructure bill has been well-publicized and hotly debated. It has been especially controversial because of its language regarding cryptocurrencies.
The $1 trillion infrastructure bill will see a vote in the House of Representatives by September 27. It will be voted on with no amendments.
The language in the bill casts a wide net. This has been fought against by those wanting a more defined scope.
It has also caused a stir because of its monumental position. The bill is the first to directly address cryptocurrency in the United States. This has been an area continuously caught in the regulatory and legislative discussion.
“The infrastructure bill is the first piece of legislation in U.S. history to consider cryptocurrency and how it is being used by standard consumers,” says Ryan Berkun, Founder & CEO of Teller Finance.
“With the bill returning to the U.S. House of Representatives for further debate regarding crypto taxation specifics, it is evident that the federal government is trying to increase their pace of adoption to more closely reflect that of the industries,” he says.
Where the crypto community comes in
The portion of the infrastructure bill relevant to the crypto community is a provision that would impose stricter government regulation of digital assets.
The regulations would greatly expand the number of cryptocurrency traders required to report filings to the Internal Revenue Service (IRS).
Congressional accountants predict the tax revenue generated by the plan could raise around $30 billion over the next decade. An earlier plan that planned to bring in $100 billion was shot down by Republicans. This was because they were concerned about expanding the IRS’s reach.
This cryptocurrency tax provision has been holding up the whole process because of its all-encompassing scope.
A group of senators and representatives on both sides took issue with some of the languages in the provision. These included senators Pat Toomey (R-Pa.)and Cynthia Lummis (R-Wyo.).
In early August, the Republican senators penned a joint letter stating that the crypto-tax amendment was vague and “unworkable.”
The broker problem
Toomey and others took issue specifically with the definition of a cryptocurrency broker.
The bill’s definition of a broker reads, “any person who (for consideration) regulatory provides any service responsible for effectuating transfers of digital assets, including any decentralized exchange or peer-to-peer marketplace.”
The group and many in the crypto community are worried that the wording would see software developers and transaction validators get tangled in the web and be labeled as crypto brokers.
“The U.S. senate infrastructure bill, under its current definition of a broker, poses an existential problem for the existing node ecosystem. This legislation is one of the most visible steps the U.S. government has taken to regulate the crypto industry, which will have the effect of stifling innovation or outright forcing companies to leave the U.S, ” explains Adam Liposky, Ecosystems Operations Lead at Pocket Network.
He adds that the process was clearly rushed, something that Toomey and others within the government have also voiced their concerns over.
A defining moment for cryptocurrency in the U.S.
The outcome of this deal will likely become a pivotal moment in the path of blockchain technologies. Those who object to the crypto tax are also worried that it will stunt the industry’s potential to effect positive change and drive the market elsewhere.
“I think the outrage is justified as it could force people in the industry to abide by rules that would be impossible for them to follow. I also think that there has been a lack of understanding and not enough time spent learning about how certain parts of the crypto world operate otherwise the wording in the bill would have been different,” says Tommy Alastra, blockchain pioneer and Cryptograph’s Co-Founder.
Stifling growth and opportunity
“The haste action of the US Senate trying to regulate and write up legislation on the new ‘Crypto tax rules’ can stifle innovation and limit economic growth opportunities,” says Gunnar Jaerv, CEO of First Digital Trust.
He points out that the digital asset industry creates jobs and that “there is plenty of evidence to suggest society is heading towards a full digitization of finance.”
Some of the areas that could be affected include supply chains, health care, education, and various artistic communities.
“The infrastructure bill might have devastating consequences on the American blockchain sector. As it is currently written, the bill could potentially target miners, stakers but also crypto developers. The problem being that the bill requires these individuals to provide information about their customers, while they do not have access to that information as cryptocurrencies are generally pseudonymous,” says Doug Leonard, CEO of Hifi Finance.
“If the bill isn’t adjusted, it might block the crypto innovation happening in the US and incentivize US crypto companies to move abroad,” he says.
What happens to miners?
Not only will several legitimate exchanges and brokers be subject to new tax requirements, if the critics are correct, so might a lot of other people involved in digital assets.
Cryptocurrency miners are reasonably concerned they might fall victim to the vague description of a crypto broker and might seek to work elsewhere.
Thus, the U.S. loses future innovation and sees the workers it currently has moved abroad to continue their careers.
The possible alienation of cryptocurrency miners could not come at a worse time for the U.S. now that all Chinese miners are looking for new homes to run operations. Currently, the U.S. and Kazakhstan are the preferred landing spots for these displaced miners.
“The recent bill in the U.S. reinforces what we have already known that crypto is global and not subject to the whims of one particular government or another. Places that embrace innovation will see benefits in employment and investment and projects moving to their shores, those who don’t will see the opposite effect,” says George Harrap, Co-Founder of Step Finance.
Arguing against tax avoidance
In addition, it’s not as if there aren’t contributions by miners and others in crypto to tax already.
“The U.S. crypto tax bill overlooks the fact that several companies that own significant portions of mining are already paying income tax. This legislation is a deliberate move by the U.S. government to reduce profitability and market returns,” says Varit Bulakul, Head of Digital Asset Division and International Business Finance Advisory at The Brooker Group.
Bulakul added that miners might have to deal with getting caught up in the regulatory net “given the rate of returns that miners currently attain.”
In addition, Sidney Powell, CEO and Co-Founder of Maple Finance, does not see tax avoidance as the primary motivator for those involved in the cryptocurrency industry.
“People are drawn to the sector because it presents the frontier ideal of the free movement of capital to pursue economic opportunity, not to elude tax,” he says.
The Biden administration has said they have no plans to force miners to report but are concerned that creating an exemption would open the door for exploits.
This is reflected by Chief Compliance Offer at FINXFLO, Mark Hope.
He guesses “that the scope of any regulation would look similar to the current definition of Broker under Section 3(4) of the Securities Exchange At. It classifies a broker as ‘any person engaged in the business of effecting transactions in securities for the account of others,’ which probably wouldn’t apply to miners.”
What it means for the crypto community
While some on social media have been dramatically calling this the end of crypto, there is also a bit of confusion about what the bill actually does. Most in the industry agree that it will have a negative impact if the vague language sticks.
Coinbase CEO, Brian Armstrong, has been a very critical voice on social media in recent weeks.
Armstrong said that “this provision could have a profound negative impact on crypto in the U.S. and unintentionally push more innovation offshore.”
He adds that the crypto community can take a lesson from this. The lesson being that “unfamiliarity with and suspicion of innovation, even among a few policymakers, can be extremely dangerous.”
The most significant change that the general community will see is the need to comply with the tax requirements laid out in the bill.
As it stands, anyone considered a broker would need to report specifics of their cryptocurrency transactions to the IRS for review.
Much like any traditional broker is required to report the sale of a stock, the sale of crypto will now be monitored by the government more closely. This will allow for taxes to be levied much easier by the IRS.
Another thing the community needs to prepare for is the possibility of penalties for those who do not comply with the new tax requirements. The penalties are not only expected to be costly but also difficult to fight in court.
Government is catching up
While the issues with the bill may indicate that legislators are not understanding as much about cryptocurrencies as they should, the bill also shows that they are taking notice of it.
This bill shows it has possibly taken the tax benefits of crypto to bring them to the party, but either way, this historic moment in cryptocurrency regulation has finally arrived.
In addition, the work by bullish senators indicates future partnerships between the government and the crypto community in the future.
“Legislators and industry leaders have demonstrated that there is dialogue and that the crypto community can self-organize and fight shoulder-to-shoulder on key issues,” says Antoni Trenchev, Co-founder and Managing Partner Nexo.
No matter how the cards fall for this cryptocurrency tax, the fact that it has held up the entire infrastructure bill shows how digital currency is becoming an area of interest in Washington, D.C.