The Crypto Industry Goes To Washington And Comes Of Age

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Cryptocurrencies, along with the regulatory vacuum they’ve created, have been on the radar of policymakers and tax authorities for years. The $1 trillion bipartisan Infrastructure Bill has brought crypto tax reporting back into focus. Legislators added new reporting requirements for crypto brokers to help pay for the Infrastructure Bill. The stricter tax rules on crypto transactions are forecast to generate about $28 billion in revenue that would go towards infrastructure development.

The crypto industry, however, isn’t happy – the reporting requirements appear hastily written and not well thought through. Section 80603 of the Infrastructure Bill has a broad definition of a ‘broker’ that encompasses not just brokers but also non-broker individuals and entities such as miners, validators, nodes, and non-custodial software developers. 

The provision brings under the financial reporting requirements a swath of stakeholders, rather than just centralized custodial exchanges, who don’t have access to the reportable information in the first place. First is the broker reporting provision, which would require brokers (as expanded by the bill) to report transactions of their customers on a form similar to 1099-B. Second is expanding current law cash reporting on form 8300 to digital assets – this is potentially broader than, and duplicative of, the broker reporting.

The IRS already requires taxpayers to disclose their crypto gains and losses in the Form 1040. The global industry has been anticipating stricter regulations not just in the U.S. but around the world. 

The crytpo industry is not against the taxes on cryptocurrency transactions and is broadly supportive of progressive policy but cannot support the way policymakers define a ‘broker’ in this instance – it is ambiguous and unworkable at the point of practical implementation.  

High Drama in the Senate

Following crypto industry objections, seeing the provision as anti-technology and anti-innovation, an amendment was put forward to clarify the definition by Senators Pat Toomey (R-Pa.), Cynthia Lummis (R-Wy.), and Ron Wyden (D-Ore.). Though the amendment wasn’t perfect, it received praise from the crypto community. 

Senators Mark Warner (D-Va.), Kyrsten Sinema (D-Ariz.), and Rob Portman (R-Ohio.), who also drafted the original provision, proposed an alternative amendment, which received support from the White House and Treasury Secretary Janet Yellen. In this amendment, the broker definition remained broad and could still potentially include entities like decentralized protocol software developers.

Senator Ted Cruz proposed striking all crypto language from the bill. As ‘no more than five’ senators could answer ‘what the hell a cryptocurrency even is,’ he said, ‘the barest exercise of prudence would say we shouldn’t regulate something we don’t yet understand, we should actually take the time to try to understand it.’

In the end, the two camps proposed a compromise amendment to clarify the definition. The last-minute amendment required support from all the 100 senators. But the industry lost the fight when Alabama Republican Richard Shelby objected only after attempting to file his own amendment for military spending which was rejected by Senator Bernie Sanders (D-Vt.), resulting in Shelby then objecting to the overall compromise.

The Senate passed the Infrastructure Bill with the fallacious definition of a ‘broker’. Now the House of Representatives must pass the bipartisan bill before it is sent to President Biden for signing. Crypto advocates will get another chance when the House of Representatives takes up the bill in September but will face an uphill battle due to procedural issues. 

Hasty Tax Policy Could Stifle Innovation

Crypto taxes are a complicated affair. It’s imperative for policymakers to take the time to understand the nuances when drafting the regulations. Crypto advocates are concerned that without the amendment, the provision could stifle crypto innovation in the U.S. It could force businesses to move overseas since it would potentially cause confusion and set up reporting expectations that can’t be fulfilled.

Policymakers appear to be struggling to grasp the complexity of crypto taxation. The University of Chicago professor Daniel Hemel observed that the Portman-Warner-Sinema amendment creates a carve-out for entities ‘validating distributed ledger transactions through proof-of-work (mining).’ It means the policymakers think that ‘mining’ and ‘proof-of-work’ are the same thing. 

‘Cryptocurrency is a concoction of cryptography, technology, miners, users and traditional finance. Each of the players in the ecosystem plays a vital role in stabilizing the incentive structure. More than just one or two layers of technology — and even industries — are intertwined. Blanket taxation won’t kill a $2 trillion dollar industry, but hasty tax decisions will add confusion and impede the industry’s growth,’ notes the Bybit exchange.

Senator Cynthia Lummis (R-Wy.) said Congress will have to revisit the issue. Lummis said in an interview, ‘All that means is we’re gonna have to fight this another day because it’s important that the Congress define these terms and create a level playing field. Going forward this fall we’re gonna have to be much more proactive about defining terms in this space so people can still innovate.’

Lisa Zarlenga, co-chair of the tax group at Steptoe & Johnson and co-chair of the tax working group at Global Digital Finance, noted that, even if the bill is not changed before it is enacted, the reporting requirements will have to be implemented by Treasury and the IRS in regulations and forms, giving the crypto industry another chance to educate policymakers.

“Senators Portman and Toomey made some helpful comments on the Senate floor regarding the intended scope of the definition of broker, which will hopefully be considered by Treasury and the IRS,” said Zarlenga.

Zarlenga, is a co-author of the compendium Tax Treatment for Cryptoassets, which should be required reading for policy makers, also noted that another new reporting provision in the bill, which has received a lot less attention, would extend reporting for cash payments in excess of $10,000 to digital assets, adding, “This provision is potentially quite broad and could impose duplicative reporting requirements on brokers.”

Industry Must Help Educate Policymakers

Despite all the lobbying, public outreach, and Twitter campaigns, the crypto industry failed to muster support to change the scope of the term “broker.” The industry needs better organization, with many disparate member’s associations unwilling or incapable of cooperating on key industry issues that matter to policy makers and regulators.

Sandra Ro, chief executive of the Global Blockchain Business Council, a global-not-for-profit dedicated to advocacy, is focused on better education for policy makers. The council has a proactive program for educating policy makers in the U.S. and around the world to better understand crypto and blockchain technology and its benefits to society.

Says Ro, “U.S. policymakers are grappling with the rapid growth and maturation of crypto and digital assets, and how to best regulate them. Under this context, education remains foundational to GBBC’s engagements across local, state, and federal government. Further, we, along with our global partners, are focused on the development of common taxonomy and standards for blockchain and digital assets, which is paramount to the industry’s growth and informed regulation.”

Arguably, the industry went into their very first major legislative battle with grossly insufficient firepower – more financial firepower for the industry is required in Washington. Last year, the Blockchain Association had a budget that was merely 1% that of the American Bankers Association. The association spent $160,000 on lobbying during the second quarter, according to its congressional disclosures. By comparison, the American Bankers Association spent $2.5 million in the same period.

“We’ve known for a long time that we are…

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