Published: September 3rd, 2021
After ruffling crypto industry feathers in early August with a crypto tax provision embedded within the US Senate's $1 trillion infrastructure bill, the White House now wants to weave new crypto reporting requirements into its planned $3.5 trillion budget bill.
According to a new report published in The Hill this week, the bill’s proposed language would force US crypto firms to submit data about non-American users. The information could then be shared and cross-referenced with taxpayer data from other countries to ensure traders pay their full share of taxes.
However, none of those provisions are in the current spending package, which will need the assent of all 50 Democratic Senate votes if it’s going to pass. The USD 3.5 trillion budget includes funding for universal pre-Kindergarten childcare, fighting climate change, addressing drought, clean energy, and affordable housing. It is being pushed by House and Senate Democrats against Republican party opposition.
The White House has already hinted that exchanging information with other jurisdictions is a sure-fire way of keeping crypto-asset holders in line with their tax obligations. The Treasury thinks some crypto investors have set up shell entities to hide their assets in the offshore wallets offered by crypto exchanges.
To crackdown on the practice, Washington needs tax data from other countries. To get it, the Treasury needs information of its own to trade. That’s where the revised reporting requirements come in.
Earlier in August, crypto advocacy groups, including the Blockchain Association and Coin Centre think tank warned about new crypto tax provisions in the USD 1 trillion infrastructure bill due to be voted on by the House in September. A last-minute addition re-defined any business dealing in digital assets as a "broker," and required them to share tax information with the US Internal Revenue Service (IRS).
While the change was widely seen as a way to pay down a USD 28 billion portion of the bill’s cost by locating new taxable business revenues, critics argued that the language was too broad and could catch miners in the dragnet. Suppose the broker tag is applied to miners, for example. In that case, they'd need to gather KYC information about everyone whose transactions they validate — an almost impossible task. That has sent shivers through the crypto industry.
A multi-stakeholder lobbying effort to change the bill’s language failed to sway senators. At the same time, the House of Representatives activated a procedure to stop the bill from being amended there either.
While the White House has since hinted that it's not interested in applying the new rule to non-custodial actors, a double-whammy of news reporting and new tax requirements in one month has naturally left many in the industry fearful about what might be coming next.
A statement from Coin Centre said ‘the industry has been asking for clear tax reporting guidance for years, so we have no objection to the new provisions in principle. We do object to 'must-pass bills with last-minute additions that pushed through congress with little or no public input.’
In early August, the Senate passed a massive infrastructure spending bill that would fund a range of major projects from bridge-building to highway improvements and safe water treatment. To pay for part of the bill’s mammoth price tag, the Biden administration introduced a change to the IRS definition of brokers to wrap in any business that deals in or makes money from trade in digital assets.
Those ‘brokers’ would then have to complete IRS 1099 forms on behalf of their customers, which include basics like full name and addresses. The calculation assumed that a simple change on paper could add USD 28 billion in tax revenues that would otherwise go uncollected.
While a centralised cryptocurrency exchange like Coinbase would have no trouble meeting the requirement, Coin Centre and others have argued that the broad definition is unworkable in practice. If applied literally, it could pull in any entity processing blockchain transactions, including miners or validators.
It could also touch cryptocurrency wallet providers and snuff out new decentralised finance (DeFi) projects. The decentralised and anonymous nature of DeFi businesses would make the requirements all but impossible to fulfil.
Privacy groups have also piled in with criticism, calling the infrastructure bills late provision a backdoor way to increase financial surveillance.
An amendment to clarify the language and exempt non-custodial crypto actors failed to pass.
While the Biden administration is now indicating it has no interest in applying the new reporting requirements to miners, the door would remain open to future administrations or allow leeway for a later crackdown on crypto by the current occupant of the White House.
The Blockchain Association issued a statement this week urging legislators to kill the new language and start again. ‘Instead of clarifying something that hasn’t yet been enacted into law, we encourage Congress to work with industry and keep the US a crypto innovation leader.’
The problem remains that the bill’s definition of broker is so broadly worded. 'Broker' would normally refer to an exchange like Coinbase or Binance. In the infrastructure bill’s updated language, any business that touches crypto in any way could find itself labelled a ‘broker’.
Crypto advocates worried that the change would threaten DeFi startups, crypto miners, and even crypto investment firms who would all be required to submit customer forms with the IRS, a requirement that blockchain’s anonymisation capabilities could make impossible.
If it passes, the US crypto industry could find itself in the same situation as online gambling firms a decade ago, when the Treasury and IRS effectively regulated the sector out of business. To politicians and financial regulators, cryptocurency businesses look a lot like internet casinos, simultaneously decadent and rich. That makes them an ideal political target for a tax revenue raid.