When Congress passed the Infrastructure Investment and Jobs Act, lawmakers included a measure to require stricter reporting of capital gains on crypto. Since 2014, the IRS has made clear that cryptocurrencies are “property,” and therefore subject to federal taxes. But, due in no small part to the cryptographic nature of these assets, crypto investors have been notorious for dodging their tax bills. The IRS believes that unreported taxes on crypto amount to tens of billions in lost revenue.
Ostensibly to help offset the costs of the massive $1.2 trillion infrastructure package, Congress decided to subject digital assets like crypto to further reporting requirements in an attempt to collect this revenue. To do this, the law defines “any person who...is responsible for regularly providing any service effectuating transfers of digital assets” as a “broker” under the tax code. Federal law requires brokers to report the name, address, and gross proceeds of any transactions they facilitate to the IRS.
The issue with this new reporting scheme is not so much that Congress wants to tax crypto. Rather, crypto investors and the industry at-large object to the overly-broad definition of “broker” as wholly unworkable, and for good reason. As Lawrence Zlatkin, Global VP of Tax at Coinbase, told Cointelegraph, “This [loose definition] will harm innovation and stifle the potential of a hugely important technology at its earliest stages of development...Tax policy should be thoughtful and deliberate. Broad overreach is a regulatory mistake.”
Without major changes, the new reporting requirements for digital assets could seriously harm the future of this fledgling industry.
As written, the new definition would apply strict reporting requirements up and down the entire crypto stack, even where it makes no technical sense. Miners, for example, who use computers to verify crypto transactions, certainly “effectuate transfers of digital assets,” and would presumably be subject to the reporting requirements. But they have no access to the information required to report the transactions they facilitate, leaving them in a Catch-22.
When the Senate was first considering the infrastructure bill back in August, Senators Wyden, Lummis, and Toomey reached a bipartisan consensus on amended language that would have fixed the definition of broker. Unfortunately, this amendment was doomed by the objection of Sen. Richard Shelby (R-Ala.) over a separate issue related to military spending. Now that the infrastructure package has been signed into law, Senators Lummis and Wyden are once again attempting to clarify the new definition to avoid stifling the crypto industry. This time, they are joined by Rep. Patrick McHenry - Ranking Member on the House Financial Services Committee - and a bipartisan group of ten House cosponsors.
S. 3249 and H.R. 6006 are far from companion bills, but both seek the same end: clarifying the ill-conceived definition of broker. S. 3249 does this through a rule of construction. The bill states that “any person solely engaged in the business of” validating crypto transactions (i.e. mining), selling hardware or software to control private keys (i.e. unhosted wallet providers), or “developing digital assets or their corresponding protocols” (i.e. crypto developers) are not to be considered brokers.
H.R. 6006, dubbed the Keep Innovation in America Act, takes a broader approach. It changes the definition of broker found in the infrastructure package to read: “any person who (for consideration) stands ready in the ordinary course of a trade or business to effect sales of digital assets at the direction of their customers.” The important distinction here is that H.R. 6006 focuses on the “sales of digital assets” rather than the “effectuating [of] transfers.” The House bill also makes other, less consequential changes to the definition of “digital assets,” the timeframe of implementation, and return requirements for certain transfers. Also notable, the Keep Innovation in America Act requires the Secretary of the Treasury to produce a report analyzing the “effect of expanding the definition of cash” to include digital assets.
Having just been introduced amidst a flurry of Congressional activity, the path forward for both of these new bills is unclear. With Congress scrambling to wrap up their current priorities before the holiday season - an agenda that includes must-pass legislation like next year’s budget and national defense authorization - it is highly unlikely that either bill will see a vote before next session. However, the mounting pressure from investors, lawyers, and outside organizations means that this issue is not going away anytime soon. What’s more, the fact that the law doesn’t take effect until the end of 2023 gives Congress plenty of time to take up one or both of these bills.
The crypto industry deserves regulatory clarity, and the current definition only adds to the existing confusion. Either of these bills presents a preferable alternative to the current definition. More importantly, the bipartisan nature of both measures demonstrates that there remains a strong willingness in Congress to address the issues of the existing law. Regardless, if Congress is serious about protecting the crypto industry from broad regulatory overreach, they should take up these measures post-haste and work out the details in conference.