August 31, 2021 |James Messi
The United States is aiming to enforce tax compliance in the under-regulated digital currency market. In President Joe Biden’s infrastructure bill, the cryptocurrency industry may be mandated to cover nearly $28 billion in its whopping $1 trillion infrastructure package. However, the bill is not safe from scrutiny. The specific crypto-provision became so controversial for the crypto-inclined people that it caused a short delay in the progress of the bill.
The Controversial Term ‘Broker’
The cryptocurrency industry managed to snatch a five-page clause from an entire 2,702-page infrastructure bill. While people in the cryptocurrency industry take it as an indication of lawmakers finally recognizing the permanence of the industry, the clause brought about confusion to its critics due to the broad definition of the term ‘broker’.
In the provision, a broker, who will be subjected to tax reporting to the Internal Revenue Service, was defined as any person who facilitates and regularly provides any service in the transfer of any assets on behalf of another person. For people greatly unaccustomed in the industry, the definition can be pretty simple and straightforward. However, for those who spend much of their time in the business, the definition is questionable and raises some issues.
The provision broadens the term to include miners, hardware manufacturers, and software developers. It has the potential to compel cryptocurrency developers, companies, and anyone involved in mining digital currencies to gather and report information about its users. A decentralized financial system used in cryptocurrency is not designed to work like this.
With this, legislators are also cautioned of financial monitoring and unfavorable consequences for developers and those mining cryptocurrencies.
Senator Ron Wyden (D-Oregon), the chair of the Senate Finance Committee, objected to the clause saying the provision failed to grasp the functionality of the technology. Sen. Cynthia Lummis (R-Wyo.), on the other hand, stated that a real committee is needed to process the issues raised by critics. The senator committed to make the provision better. Sen. Patrick Toomey of Pennsylvania also vowed to amend the clause as it is “unworkable” for him.
The bipartisan infrastructure bill is intended to fund public transit, roads, bridges, and more. If passed, it will be the biggest spending bill in over ten years. While the Biden administration plans to rely on revenues from other sectors like the sales from the Strategic Petroleum Reserve and Medicare spending among others, the income that will be generated from the crypto industry will still be a huge assistance, especially now that it is starting to cement itself in the world of finance.
In facing complaints from cryptocurrency advocates, two senators put forward revisions to filter the tax reporting rules. Finance Committee Chairman Ron Wyden (D-OR) together with finance committee member Pat Toomey (R-PA) proposed that the tax provision exclude individuals involved in the developing of block chain technology and wallets.
“By clarifying the definition of broker, our amendment will ensure non-financial intermediaries like miners, network validators, and other service providers — many of whom don’t even have the personal-identifying information needed to file a 1099 with the IRS — are not subject to the reporting requirements specified in the bipartisan infrastructure package,” Toomey said.
Wyoming Senator Cynthia Lummis and Colorado Governor Jared Polis both supported the proposed amendments.
Another amendment, which is not clearly getting the support from the crypto community, was suggested by Sen. Rob Portman (R-OH) and Mark Warner (D-VA). The senators proposed that the traditional cryptocurrency miners active in the energy-consuming Proof of Work systems be exempted from the new financial reporting mandate. However, those who use a “proof of stake” system would be subject to the same restrictions.
Proof of Stake systems do not require capitals for computing hardware and energy bills to solve hugely complex math problems. They solely rely on crypto participants to stake in a specific project, and then lock cryptocurrency to generate new coins.
For some, the amendment is confusing, considering that Proof of Stake is more climate-friendly and reduces the required heavy computing and large amount of energy needed in the Proof of Work mining. It demands understanding on why these senators would choose to exempt Proof of Work.
The Warner-Portman amendment was regarded as a compromise. However, for many crypto advocates it only raises new problems. They see it as a new threa.
An amendment may be adopted by unanimous consensus, but it will not be included if a single senator disagrees. Senator Wyden on Monday said his team has been committed to getting a deal among senators. Senator Rob Portman (R-Ohio) said things should be clarified. He expressed the importance to make sure that miners and stakers who validate transactions, as well as, sellers of hardware or software for digital wallets, node operators, or anyone who are not brokers are exempted from reporting.
On Tuesday, August 10, with a vote of 69-30, the U.S. Senate passed the infrastructure bill. It is now on the House of Representatives table awaiting debates in the fall. However, much to the dismay of cryptocurrency supporters, the proposed amendments made by Senator Wyden and Senator Toomey, as well as the Warner-Portman revisions, were not accepted in the bill signed by the Senate.
The one senator who raised objections on the revisions proposed was Sen. Richard Shelby (R-AL). As a result, the Senate voted to advance the bill without making any amendments.
The Initial Clause
The Senate passed the infrastructure bill against the objection of many crypto enthusiasts on how vague the term broker was defined. For this, non-custodial businesses are still part of the scoring. This is the process of the Joint Committee on Taxation (JCT) in evaluating the amount of revenue the cryptocurrency could provide. It is likely that the scoring would change if, for example, miners would be specifically excluded. As a result, the crypto clause would no longer be expected to bring in $28 billion. This concern was levied against the first amendment proposed by Sen. Wyden and Sen. Toomey.
The bitcoin industry will now have to wait and see how the ongoing negotiations over the crypto provisions in the infrastructure bill progress. Check back to Beaxy’s blog for further updates on cryptocurrency’s role in the United States’ infrastructure bill.