Congress Is Addressing the Crypto Industry’s Concerns over Tax Proposal
The $1.2 trillion infrastructure legislative package making its way—in fits and starts—through Congress over the summer and fall of 2021 was written to include funding for numerous improvements of national importance. These include repairs and upgrades to roads, highways, and bridges; expansion of the electrical grid; and the reach of broadband Internet into underserved communities. But the bill also has a provision that encompasses tighter regulation of cryptocurrency markets, drawing attention from the fintech sphere.
Regulating crypto brokers
Through a provision of the bill designated “Information Reporting for Brokers and Digital Assets,” regulators hope to enhance the ability to enforce tax laws on the cryptocurrency industry while generating additional income to support spending plans for the rest of the bill.
Experts noted that on passage of the bill, the United States Department of the Treasury would gain the ability to impose new requirements for tax reporting on crypto transactions. What regulators like Securities and Exchange Commission head Gary Gensler are ultimately going for is a more systematized way of identifying and rooting out fraud and money laundering in the historically under-regulated industry.
Specifically, the bill would require brokers in crypto to report any type of transfers of digital asset classes to accounts where users’ names and addresses are unknown. This provision, which would take effect in 2023, would place significant burdens on brokers already subject to the Know Your Customer (KYC) requirement. To keep its volume of required reporting low, a crypto brokerage would need to operate within a well-honed system for identifying client accounts that receive transfers.
Broad regulatory reach
For a large portion of the crypto trading community, one part of that original provision cut particularly deep. It defined a “digital-asset broker”—in what some saw as overly broad terms—as “any person” who, in exchange for “consideration,” regularly supplies “any service” that facilitates the transfer of “digital assets on behalf of another person.”
The central concern here was that miners, or even software developers, could be ensnared in the reporting requirement. In this view, imposing these stringent requirements on such frontline actors—many of whom are freelancers—would impede future innovation and potentially drive many people working in this sector to relocate outside the US.
A responsive fix
The crypto industry protested, and Congress inserted an amendment that seems to have addressed these concerns. The language of the amendment states that the tax-reporting requirements as applied to brokers specifically exclude miners, developers, node operators, and other like categories of workers.
As of mid-October, the bill’s passage in any form still hung in the balance as Congress and the White House continued negotiations.