Experts criticise US Congress plan for expanded crypto taxation

On July 28, US senators approved a bipartisan bill aimed at modernising America’s infrastructure. The plan would spend about $1 trillion — part of the funding be provided through a tougher regime of taxing cryptocurrencies.

The bill contains new reporting requirements for participants in the digital-asset industry. In particular, they will be required to report to the Internal Revenue Service (IRS) cryptocurrency transactions over $10,000. By doing so, the senators expect to raise around $29 billion for the federal budget.

According to lawyer Jake Chervinsky, the bill expands the definition of “broker” in the U.S. tax code to cover nearly all participants in the sector, including non-custodial actors (for example, miners), and obligate them to comply with KYC.

2/ The bill expands the definition of a «broker» to include «any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets.»

Earlier drafts said «even if non-custodial» & explicitly included DEX & P2P markets.

— Jake Chervinsky (@jchervinsky) July 30, 2021

“This definition is so broad that it could apply to almost any economic actor in the U.S. crypto industry, if taken literally,” — wrote Chervinsky.

Lawyer noted that earlier versions of the bill contained the wording «even if not custodial» and covered markets DEX and P2P-exchangers.

“This definition is so broad that it could apply to almost any economic actor in the U.S. crypto industry if taken literally,” he stressed.

According to Chervinsky, the definition would include participants in the decentralized finance market (liquidity providers, protocol operators and others), as well as “non-economic actors” — node operators and developers of digital wallets.

Brokers will be required to comply with IRS reporting requirements. In particular, they will need to fill out Form 1099, which requires collecting client data, including names, addresses and phone numbers.

Chervinsky argues that the bill would do far more harm than good:

• “Passing a bill whose compliance is literally impossible would fly in the face of logic unless the aim is to wipe out the industry.” The lawyer cites miners who, for a range of reasons, will not be able to meet IRS requirements;
• as a consequence, the US would lose its share of the digital-currency mining market. Chervinsky noted that China has already made a similar mistake;
• the bill, in principle, would not work — for every dollar of tax revenue, we would lose two (or ten), as industry companies shut down or relocate;
• the initiative would undermine work already carried out by FinCEN;
• the regulatory act would infringe Americans’ civil liberties.

The lawyer said that to achieve the stated aims, Congress does not need to change the concept of “broker” in the tax code. Instead, it should introduce a clear definition of “digital asset,” which is missing from the bill.

I’m not sure we even have to change the Tax Code’s «broker» definition to achieve the Senator’s goal.

Aren’t people facilitating trades for clients & cash already subject to current law?

We only need to add a good definition of «digital asset,» which this draft bill also lacks.

— Jake Chervinsky (@jchervinsky) July 31, 2021

“This requires miners to fill out 1099s? They have no clients, it’s meaningless,” wrote Agrawal.

He stressed that the bill would fairly apply to existing brokers — cryptocurrency exchanges. He noted that Coinbase chief Brian Armstrong “literally asked for this” in 2017.

meanwhile, it does make sense for actual BROKERS to be treated like brokers. no one is complaining about that.

in fact, here’s brian armstrong literally asking for that in 2017 https://t.co/mgt2XfW6HS pic.twitter.com/59OYuzffOr

— Neeraj K. Agrawal (@NeerajKA) July 30, 2021

“How would miners fill out 1099s? They have no clients, it’s meaningless,” wrote Agrawal.

He noted that the bill would be fair to apply to existing brokers — cryptocurrency exchanges. He added that Coinbase chief Brian Armstrong “literally asked for this” in 2017.

meanwhile, it does make sense for actual BROKERS to be treated like brokers. no one is complaining about that.

in fact, here’s brian armstrong literally asking for that in 2017 https://t.co/mgt2XfW6HS pic.twitter.com/59OYuzffOr

— Neeraj K. Agrawal (@NeerajKA) July 30, 2021

“How would miners fill out 1099s? They have no clients, it’s meaningless,” wrote Agrawal.

He stressed that the bill would be fair to apply to existing brokers — cryptocurrency exchanges. He noted that Coinbase chief Brian Armstrong “literally asked for this” in 2017.

meanwhile, it does make sense for actual BROKERS to be treated like brokers. no one is complaining about that.

in fact, here’s brian armstrong literally asking for that in 2017 https://t.co/mgt2XfW6HS pic.twitter.com/59OYuzffOr

— Neeraj K. Agrawal (@NeerajKA) July 30, 2021

“How would miners fill out 1099s? They have no clients, it’s meaningless,” wrote Agrawal.

Kristin Smith, head of the lobbying group The Blockchain Association, said the organisation has sent a letter to Congress criticising the bill. She stressed that in its current form the measure runs counter to innovation and does not help achieve its stated aims.

Here’s the letter we sent to Congress on the crypto provision in the #infrastructure bill. https://t.co/SPfCU9LAbl

— Kristin Smith (@KMSmithDC) July 30, 2021

In Congress they do not believe the bill would lead to such heavy consequences. As Politico reports, a spokesperson for Senator Rob Portman — one of the bill’s authors — stated:

“This legal formulation does not redefine digital assets or cryptocurrency as ‘securities’ for tax purposes, does not impinge on the privacy of individual cryptocurrency holders, and does not compel non-broker actors, such as software developers and miners, to comply with IRS reporting obligations. [The bill] simply clarifies that any natural or legal person acting as a broker, facilitating trades for clients and receiving compensation, must comply with standard reporting requirements.”

Earlier the IRS requested an additional $32 million in funding to expand its ability to administer taxes in the cryptocurrency space and to combat cybercrime.

As a reminder, the new version of the IRS Form 1040 includes an updated formulation of the question about cryptocurrency transactions. This could reduce ambiguity for taxpayers.

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