As part of its sweeping, must-pass infrastructure bill, the Senate is debating a provision that would create compliance burdens and data collection requirements for members of the cryptocurrency ecosystem, including many startups.. While the language in the bill is meant to target tax evasion in cryptocurrency trading, if enacted, the provision could have broad, unintended consequences.
The language targeting cryptocurrency reporting requirements could slow progress on the bipartisan infrastructure bill as industry groups and legislators assert that the provision as written is “an attempt to apply brick and mortar rules to the Internet and fails to understand how the technology works.” Tacked on as a pay-for, the Joint Taxation Committee estimates the proposal could net $28 billion.
The first iteration of text sought to widely and ambiguously expand the definition of “broker” under the Internal Revenue Code, which could subject non-custodial companies to IRS reporting requirements that include the collection of user data. The crypto industry expressed concern that, under the bill, software developers, certain crypto startups (including those that create crypto wallets), hardware manufacturers, and miners that do not perform the traditional duties associated with a broker and “don’t have customers with know-your-customer information,” would be swept into the definition of that title. And having a large group, especially those that are not actually brokers compile data on their users poses privacy concerns.
Shortly after introduction, the text was modified to clarify the definition of “broker,” to include anyone “responsible for and regularly providing any service effectuating transfers of digital assets” on someone else’s behalf, while also eliminating language that targeted decentralized exchanges and peer-to-peer marketplaces. While clarifying changes were welcome, the crypto industry continues to urge lawmakers to ensure that “the tougher tax enforcement should not apply to miners, or creators of digital money, or the “node operators” that keep the software behind transactions moving.”
In response to the provision, which has faced scrutiny for failing to understand how cryptocurrency technology works, Sens. Wyden and Lummis have introduced an amendment to the bill that would clarify how the new reporting requirements would not apply to “intermediaries,” including miners. But it is unclear whether the amendment, if adopted, would affect the estimated pay-for total.
While the future of the expanded broker proposal in the infrastructure bill remains fluid, it may serve as a jumping off point for further cryptocurrency regulation. And with cryptocurrency becoming increasingly more dominant in the startup space, it’s expected that more guidance and regulations on the growing industry come down the line. As the Senate continues to consider the infrastructure package, policymakers should ensure noncustodial entities aren’t overregulated as brokers and forced to collect unneeded information, which could stifle the growth of the cryptocurrency industry in the U.S.
