Senate deliberations continued over the weekend over a $1 trillion infrastructure bill, with a particular focus on how the bill could impact the world of cryptocurrency. The infrastructure bill, known as HR 3684, allocates money to build roads, bridges, transportation systems, and support clean energy, among other developments. The bill includes a tax provision that outlines plans to raise about $28 billion for that $1 trillion package through taxes from crypto transactions.
“As we know, cryptocurrency is a digital asset that more and more people are investing in. We should want that to continue, and continue in a healthy and sustainable way,” said Sen. Rob Portman (R-OH) during Sunday’s Senate session. Portman, along with other senators, proposed an amendment to the bill’s cryptocurrency tax provision in order to quell concerns over digital rights. However, Portman’s was the second proposed amendment that dealt with this concern. The two competing amendments illuminate the concerns of those in the crypto space who are particularly unhappy with one key word in the tax provision: “broker.”
Cryptocurrency investors are unhappy with the new tax provision
The bill identifies a “broker” as anyone “responsible for and regularly providing any service effectuating transfers of digital assets on behalf of another person,” and anyone thus identified would be subject to tax reporting requirements. That appears to include people like “miners,” who use a “proof of work” system by solving algorithms with computers and software that, if correct, serve as verification for crypto transactions. Miners don’t have customers, so they wouldn’t be able to get access to the information necessary to complete a 1099 tax form — something the provision requires brokers submit. Brokers must also submit reports of any transactions over $10,000 to the Internal Revenue Service (IRS), which was already required of them before the bill was proposed.
Digital rights nonprofit the Electronic Frontier Foundation (EFF) believes such requirements are also an issue of privacy. “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,” the foundation wrote in a statement issued last week.
Cryptocurrency’s decentralized financial system and its blockchain transactions don’t tie information to an individual, but rather to the series of transactions that came before, thus cryptocurrency marketplaces do not easily allow for the collection and reporting of information on users. Twitter CEO Jack Dorsey weighed in on the current state of crypto discussions. “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 ask that will only drive development and operation of this critical technology outside the US,” tweeted Dorsey.
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 ask that will only drive development and operation of this critical technology outside the US.— jack⚡️ (@jack) August 8, 2021
The tax provision has met pushback from other digital rights advocates, like the nonprofit Fight for the Future, which urged supporters to call senators and encourage lawmakers to reconsider the crypto regulations. “We feel strongly that policies that impact people’s basic civil liberties and people’s rights in the digital age should never be tacked on to legislation like an infrastructure bill,” Evan Greer, director of Fight for the Future, told CNN. Additional backlash came from cryptocurrency stakeholders like Square, Coinbase, and RibbitCapital, that were among a group of entities to sign onto a joint letter addressing the bill’s shortcomings and encouraging alternatives.
The debate over who should be exempt from financial reporting
In response to the criticism, Sens. Cynthia Lummis (R-WY), Ron Wyden (D-OR), and Pat Toomey (R-PA) proposed an amendment to the bill’s tax provision that would reinstate protections for individual investors. The amendment releases entities — including miners, software designers and protocol developers — from the need to report data that would be difficult or impossible for them to collect. Specifically, if passed, the amendment would exempt brokers from the following reporting requirements:
“(A) validating distributed ledger transactions (B) selling hardware or software for which the sole function is to permit a person to control private keys which are used for accessing digital assets on a distributed ledger, or (C) developing digital assets or their corresponding protocols by other persons, provided that such other persons are not customers of the personal developing such assets or protocols.”
And then there’s the proposed amendment from Sens. Mark Warner (D-VA), Rob Portman (R-OH), and Kyrsten Sinema (D-AZ), which is also backed by the White House. The Warner-Portman-Sinema amendment would exempt traditional cryptocurrency miners who participate in time-consuming “proof of work” (PoW) systems like Bitcoin and Ethereum 1.0 from the financial reporting requirements outlined in the tax provisions. However, it would maintain the reporting requirements for those using a “proof of stake” (PoS) system used by many altcoins (cryptocurrencies other than Bitcoin), which is less energy-intensive and gives mining power based on the percentage of coins held by a miner.
Currently, only altcoins (any cryptocurrency other than Bitcoin) use PoS systems, which leaves their users at more of a disadvantage if the Warner-Portman-Sinema amendment were to be passed. From a legislative perspective, though, this option may be more attractive, and has more administration support.
White House press secretary Jen Psaki praised the Warner-Portman-Sinema amendment because the administration believes it “strikes the right balance and makes an important step forward in promoting tax compliance.” Treasury Secretary Janet Yellen spoke with lawmakers Thursday about concerns over the Wyden-Loomis-Toomey amendment, implying that they should instead support the Warner-Portman-Sinema amendment, according to the Washington Post.
This rift between supporters of the two amendments led to a more public rebuke of the Warner-Portman-Sinema amendment from one of the Wyden-Loomis-Toomey amendment’s authors. “While I appreciate that my colleagues and the White House have acknowledged their original crypto tax had flaws, the Warner-Portman amendment picks winners and losers based on the type of technology employed,” tweeted Toomey. “The Warner-Portman plan exempts bitcoin miners, but not other transaction validators or software developers who create these platforms.”
While I appreciate that my colleagues and the White House have acknowledged their original crypto tax had flaws, the Warner-Portman amendment picks winners and losers based on the type of technology employed. That’s horrible for innovation.— Senator Pat Toomey (@SenToomey) August 6, 2021
Some experts believe the conflict over the amendments entirely misses the point of just how difficult it is to regulate cryptocurrency. Writing for Coindesk, Angela Walch, a research associate at the UCL Centre for Blockchain Technologies, recommended lawmakers treat cryptocurrency as a separate issue rather than lumping it into a major spending bill.
“Just because policymakers and regulators have allowed [the crypto financial system] to grow to its present state largely unchecked, does not mean that rapid-fire, piecemeal regulation is the best way to address the situation,” she wrote.
Talks are ongoing as the Senate works to pass an infrastructure bill that has already been stymied in the past by cross-partisan differences. Given the chorus of voices across the political spectrum speaking out about cryptocurrency, the infrastructure bill appears to be more of a beginning than the last word on the future of how the US tackles crypto.