Taxes

Infrastructure bill takes aim at cryptocurrency tax evasion

  • 6 min Read
  • August 25, 2021

Author

Escalon

Table of Contents

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.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Private Equity

The Key to Private Equity Success: Strong Financial Oversight and Compliance

Private equity deals are becoming larger and more complex, making financial preparation a critical part of the process. Take Novartis’s...

Read More
Accounting & Finance

Navigating Grant Management and Financial Reporting for Biotech Startups 

Biotech startups operate in a unique financial landscape, where securing grants, venture capital, and government funding is crucial for driving...

Read More
Accounting & Finance

Financial Compliance in the Decentralized Era: What Web3 Startups Need to Know 

As the world leans into the decentralized era, Web3 startups are at the forefront, exploring the possibilities of blockchain, cryptocurrencies,...

Read More
People Management & HR

Payroll Services: Streamlining Processes in High-Turnover Consumer Goods Settings 

  Managing payroll can be complicated in any industry, but it becomes especially challenging in the consumer goods sector, where...

Read More
Accounting & Finance

Navigating Payroll for Nonprofit Organizations: Staying Compliant with Grant Funding Rules 

Nonprofit organizations often rely on grant funding to carry out their missions, whether that involves community development, education, healthcare, or...

Read More
Media & Entertainment

Compliance in the Media World: Navigating Intellectual Property and Contracts 

In today’s hyper-connected media landscape, safeguarding intellectual property (IP) and expertly managing contracts are indispensable for success. Media companies—from traditional...

Read More
Accounting

Introducing C3: Your All-in-One Financial Management Platform

Managing your business’s finances can often feel like juggling too many tasks at once, especially when you’re trying to keep...

Read More
Startups

Sourcing Passive Candidates: Strategies for Expanding Your Talent Pool with Outsourcing 

  One of the most valuable sources of talent for startups is the pool of passive candidates—individuals who aren’t actively...

Read More
Startups

Managing Cash Flow in SaaS: Leveraging Outsourced Accounting to Scale Faster 

Cash flow is the lifeblood of any business, and this holds especially true for Software as a Service (SaaS) companies....

Read More