Infrastructure bill takes aim at cryptocurrency tax evasion

On August 10, the U.S. Senate passed a historic $1.2 trillion bipartisan package in order to shore up the country’s decaying infrastructure with funding for rail, bridges, roads, transit, the electric grid and other such priorities. Now two weeks later, the U.S. House has voted to advance the infrastructure bill.

Officially called the “Infrastructure Investment and Jobs Act,” the bill earmarks $550 billion in new federal funding for transportation, broadband and utilities. The bill aims to invest $110 billion in roads, bridges and major projects, $65 billion to rebuild the electric grid, $66 billion in passenger and freight rail, $65 billion to expand broadband internet access, $7.5 billion to build a national network of charging infrastructure for electric vehicles, and $39 billion to modernize and expand transit systems. It also includes $55 billion for water infrastructure, of which $15 billion will be spent on replacing lead pipes, among other priorities. 

Apart from these, there is one segment in the bill that is garnering a lot of attention: cryptocurrency and its tax implications. The new infrastructure bill includes a section that would add regulations on cryptocurrency brokers, requiring that they “make a return” showing profits among their clients. This would make it easier for the IRS to collect tax revenue from people who trade in digital assets.

What’s the contention with respect to cryptocurrencies? 

In order to help fund the infrastructure bill, the Senate proposed a provision that would impose stricter regulations on how digital assets are taxed. This provision would mandate crypto brokers to report specific information about cryptocurrency transactions, including price points from when users bought in and sold. This would be in addition to reporting transactions of more than $10,000 to the IRS, which is already a requirement.

While lobbyists had been working to scale back the bill’s digital currency tax rules, House Democrats on Aug. 24 voted to block any amendments from being considered for the bill, meaning the crypto tax is unlikely to be removed and that industry supporters will need to find new avenues to change the policy.

It is the definition of a broker in the provision that has sparked concerns 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.” 

According to the advocates of cryptocurrency, this definition is too broad, and could potentially target people such as crypto miners, software developers, stakers and others who do not have any clients and most likely do not have access to the information needed to comply to said rules (because they are not brokers).

What are the tax implications for cryptocurrencies on participants? 

As part of plans to modernize and upgrade America’s aging and outdated infrastructure, the U.S. Senate has passed a provision to enforce tax reporting standards for cryptocurrency transactions of more than $10,000, which would allow the IRS to collect data on a wider range of transactions and ensure substantial tax compliance.

Currently, investors are required to disclose virtual currency activity in their tax return using Form 1099-B, but cryptocurrency brokers are exempt from this. There are some cryptocurrency exchanges that issue 1099-K for this purpose, but this form does not include the original purchase price.

All this information is essential for applying capital gains tax and calculating the profit rate. And since this form does not give the IRS access to basic information it needs to apply CGT to cryptocurrency transactions, several transactions go untaxed as a result. 

The new infrastructure bill aims to change this, by creating a “pay for” provision where Congress maintains it could raise $28 billion in new revenue by expanding the reporting requirements for any cryptocurrency companies considered a broker, and changing how the IRS taxes digital assets. These provisions are being put in place to tighten the laws around taxing digital asset sales. 

Cryptocurrency investors not happy with the new tax provision

While most agree that brokers and digital asset exchanges should abide by reporting requirements, and those earning capital gains should pay their taxes, the new bill’s expanded definition of a broker includes virtually all kinds of participants in the industry, including miners, software developers, validators and node operators.

However, none of these parties are in a position to comply with this law. For instance, miners, validators and decentralized exchanges are the three types of crypto players.

Miners use a proof of work method to verify transactions. For this, they donate computing power and may receive cryptocurrency in exchange. However, they are not involved in onboarding buyers and sellers, and do not hold any data on the identities of participants.

Validators use proof of stake method for confirming transactions. In this method, participants anonymously put their assets at stake in order to keep the network running. The more assets they have at stake, the more transactions they can validate. And like miners, they do not screen the identities of participants.

Traditional crypto brokers and exchanges such as Gemini and Coinbase must comply with new laws approved by the Senate. However, exchanges are entirely distributed, with no central authority to identify and disclose individual transactions on the network. In fact, they use a combination of cryptography, mathematics and smart computer code to perform all the functions of a financial intermediary, but in a decentralized, transparent and extremely auditable manner.

According to the digital rights nonprofit foundation, the Electronic Frontier Foundation, such requirements also raise the issue of invasion of privacy. They released a statement that reads, “The mandate to collect names, addresses, and transactions of customers means almost every company even tangentially related to cryptocurrency may suddenly be forced to surveil their users.” 

Twitter CEO Jack Dorsey also shared his views on the issue. He tweeted, “Forcing reporting rules on Americans who develop software and hardware, who mine and secure the network, or who run nodes to build resilience and efficiencies, is an impossible task that will only drive development and operation of this critical technology outside the US.”

Another digital rights advocate, the nonprofit Fight for the Future, is urging crypto supporters to get in touch with their respective state senators and encourage lawmakers to reconsider the crypto regulations.