Last month, President Biden signed a landmark Infrastructure bill into law. Although it wouldn’t seem as though an ‘infrastructure’ act would have any effect on cryptocurrencies, it did. In fact, the same day the Act was signed, both Bitcoin and Ethereum saw their value plummet (1).
On November 15, 2021, President Biden signed the $1.2 trillion ‘Infrastructure Investment and Jobs Act’ into law. As the name suggests, the Act covers a broad range of infrastructural matters. In particular, it designates substantial financing and resources to roads, bridges, water systems, building resilience, the internet and cybersecurity.
The Act will come into force January 2024.
Alongside traditional infrastructure, the Act added new tax reporting requirements for certain cryptocurrency transactions.
Specifically, the Act extends the pre-existing anti-money laundering cash reporting requirement under 26 U.S.C. § 6050I (2) to cover transactions involving ‘digital assets’.
The original 6050i reporting requirement means that any business that receives over $10,000 in cash has to file Form 8300 (3) with the IRS. This form requires the name, address, and Taxpayer Identification Number (TIN) of the payer and the recipient.
Until now, this requirement has only applied to ‘cash’. Cash was defined as ‘coins, currency of the United States and a foreign country’ (4), and could also include ‘cashier’s checks, bank drafts, traveler’s checks and money orders with a face value of $10,000 or less.’ (5) Form 8300 mainly applies to ‘in person’ transactions. Importantly, that reporting requirement does not apply to traceable electronic transactions with credit cards, or platforms like PayPal.
Under the Infrastructure Act, however, the reporting requirement is transposed onto a new category called ‘digital assets’, including cryptocurrencies. Therefore, anyone that ‘receives’ digital assets worth more than $10,000, must report to the IRS. The Act defines ‘digital asset’ as any digital representation of value recorded on a cryptographically secret distributed ledger or any similar technology.
These provisions aim to facilitate taxation of cryptocurrency trades and are forecast to raise $2.8 billion a year.
In addition, the Act also states that ‘brokers’, referring to cryptocurrency exchanges, must file a Form 1099-B, which covers proceeds from broker and barter exchange transactions. In doing so, Brokers will need to disclose the identities and addresses of their customers.
The effect on cryptocurrencies will ultimately come down to how and to what extent the new obligation is implemented. If extensively enforced, critics fear the Act will have a detrimental impact on the crypto industry and innovation.
Most importantly, it could result in businesses, investors, and consumers having to collect sensitive transaction information, including who they’re dealing with. This, according to Tech Crunch, ‘may be onerous enough to discourage further investments, which ultimately may make the tax worthless or at least generate far less revenue than estimated.’
Critics of the new regulations argue that there will be a negative impact on businesses, consumers. This will fall especially on anyone already engaged in cryptocurrency exchange and transaction. There is also concern about what The Act means for the future of cryptocurrency.
One of the main points of criticism is that the transactions affected by the reporting requirements, are not equivalent to the cash transactions that 26 U.S.C. § 6050I (6) originally covered. And for this reason, critics feel it’s impossible to transpose reporting requirements neatly onto digital assets.
6050i was originally passed as an anti-money laundering measure, and as such ‘a particular complication in applying this old law to new technology is that the ‘sender’ may not be a discrete identifiable individual, or even business.’ (7) The ‘sender’ could actually be a decentralized exchange, a group of people, or even an anonymous individual. Industry advocates worry that this will make the collection of tax information complicated.
Another main critique is the obvious disjuncture between blockchain’s three founding tenets and the principle of reporting to the IRS. Cryptocurrency is based on ‘privacy, efficiency and decentralization’. Through these principles, it offers users a means to carry out secure, peer-to-peer transactions without third party involvement.
For this reason, industry advocates view these reporting requirements as data privacy disasters waiting to happen. Given the nature of blockchain technology, the reporting requirement could result in unregulated actors holding sensitive personal data.
In addition, the Act also stipulates that a ‘broker’ must keep track of certain details, and gives the IRS discretion to define exactly what that means. Critics are concerned that the Act’s definition of ‘broker’ is far too broad. Thus, implicating individuals who are not party to the customer data needed to remain compliant with the 1099-B reporting requirement. This could leave ‘cryptocurrency miners, developers, technology providers and everyday users [saddled] with mandates to report information of which they are ignorant and [threatened] by potential felony convictions.’ (8)
In reality, we are yet to see the real effect of the Act on cryptocurrency. Especially given the support for a substantial amendment that ‘will soften the reporting requirements before they go into effect in 2024.’ (9)
On the same day that Biden signed the Act into law, a bipartisan group of Senators moved to amend the regulations, stating the Act is overly restrictive, and emphasizing the importance of American innovation in the digital assets space (10) The group supports amendments to the Act that will ‘foster innovation, [rather than] stifle it.’ (11)
In short, the proposed amendments look to relax the reporting requirements and refine the definition of a ‘broker’. This definition is particularly important because it ensures that cryptocurrency miners and others not directly involved in customer transactions are not implicated.
And this won’t be the last time that the government will seek to address and regulate cryptocurrency. The anticipated $1.7 trillion reconciliation ’Build Back Better Act’ is also expected to cover cryptocurrency. In an increasingly digitalized world, it is inevitable that legislation will change and adapt to cope with new innovations. Exactly what that legislation will and should look like is up for debate.
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