Moneybox

Why the Crypto Industry Is Having a Meltdown Over the Infrastructure Bill

This illustration photo shows the Coinbase logo on a smartphone in Los Angeles on April 13, 2021. - The arrival April 13, 2021, of cryptocurrency exchange Coinbase on Nasdaq is one of the most anticipated events of the year on Wall Street, where enthusiasm for record-breaking bitcoin is in full swing, despite questions about the sustainability of the market. (Photo by Chris DELMAS / AFP) (Photo by CHRIS DELMAS/AFP via Getty Images)
Crypto! CHRIS DELMAS/Getty Images

Sure, members of Congress were already adding laser-beam eyes to their Twitter pics. But if you want a sense of how the cryptocurrency industry has established itself as an influential force in Washington, pay attention to the latest, last-minute negotiations over the bipartisan infrastructure bill.

In order to help pay for the $550 billion legislation, lawmakers included a long-overdue proposal aimed at cracking down on the rampant amount of tax evasion among Bitcoin and other virtual currency traders. The proposal was expected to raise somewhere around $28 billion, largely by making crypto exchanges and other players in the industry abide by the same sort of information and reporting requirements that govern normal securities brokers. Moderates negotiating the bill wanted to make sure it was paid for, loosely speaking, and cracking down on tax dodging among doge-meme-loving Redditors (among others) seemed like a low-hanging pot of cash.

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Turns out that Shiba Inu bites. In response to the proposal, crypto companies and their trade groups panicked, arguing that the new rules were sloppily written and would be technically impossible for some companies to abide by. Over the weekend, their lobbyists succeeded at trimming back parts the language, and now two powerful senators, Republican Pat Toomey of Pennsylvania and Ron Wyden, the Democratic Finance Committee chair from Oregon, say they are working on a further rewrite. Calling the original text “unworkable,” Toomey put out a statement Monday saying “Congress should not rush forward with this hastily-designed tax reporting regime for cryptocurrency, especially without a full understanding of the consequences.”

The end result may still be a much needed reform that finally forces America’s bitcoiners, ethereum fans, and doge nuts to pay their taxes. But the last minute rescue by top members of both parties is a vivid demonstration that, in Washington, crypto has some legislative sway.

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In theory, Americans who buy and sell crypto are supposed to pay taxes on their profits—which is why there’s a box near the top of form 1040 asking if you’ve traded any virtual currency this year. All too often, however, they don’t, because the whole crypto ecosystem of exchanges and wallets isn’t bound by the kinds of reporting rules that are taken for granted elsewhere in finance. (A lot of crypto diehards might suggest that’s the whole point, but let’s not go there.)

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If you offload a bunch of stock, for instance, Robinhood or E-Trade will send you and the federal government a 1099-B form at the end of the year documenting your capital gains. Crypto exchanges like Coinbase or Binance generally don’t, though they sometimes issue other more limited forms. As a result, when the IRS has sought info on crypto accounts, it’s had to go to court.

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The lack of documentation can also make life tricky for crypto enthusiasts who do want to pay their taxes, since they have to manually calculate their profits from sometimes complicated transaction histories (or find a third-party app to do it). Since Uncle Sam is in the dark anyway about what they’ve made, a lot of them just don’t bother.

The infrastructure bill tries to tackle the underreporting problem in two ways. First, it requires any business that receives a cryptocurrency payment worth $10,000 or more to report it to the IRS, which is already required for normal cash transactions, nobody really seems to seriously object to. The second, much more controversial part would officially define crypto exchanges and other parts of the sector as brokerages and require them to start filing 1099-B forms. Many argue that Treasury already had the legal power to force them to do so, but enacting the change via legislation makes the move less vulnerable to a legal challenge, and also counts as a handy revenue-raiser.

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The crypto industry’s main complaint is that the new rule is far too broad and could potentially sweep in not just exchanges like Coinbase but also Bitcoin miners and software developers who don’t have access to the kinds of information, such as Social Security numbers, they’d potentially be required to report on individuals making transactions. “It would create this compliance nightmare,” Kristin Smith, executive director of the Blockchain Association, told me. “So then people would have no choice but to either operate illegally, leave, or shut down.” Lobbyists convinced the bill’s drafters to take out language that would have treated “any decentralized exchange or peer-to-peer marketplace” as a broker. But they’ve argued that the new text, which would treat any person “responsible for regularly providing any services effectuating transfers of digital assets” as brokers is still too expansive.

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A number of critics have suggested that the crypto industry is wildly overreacting. They’ve pointed out that, after the bill passes, the Treasury Department will have to write the regulations deciding who will be bound by the new reporting requirements, and it’s unlikely to try and put mass swaths of the sector out of business by imposing impossible-to-fulfill requirements. After all, they’re trying to tax the industry, not kneecap it, and if the Biden administration wanted to crush crypto, there are other regulatory levers it could probably pull. What’s more, tying Treasury’s hands by exempting specific players and technologies from reporting rules could create new loopholes that allow Bitcoin users to dodge taxes in the future.

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“If you look at the traditional finance community, they’ve been operating under this regime that allows Treasury to define ‘broker,’” Seth Hanlon, a senior fellow at the Center for American Progress, told me. “To shut that off would just be asking for loopholes for new forms of evasion.”

Whatever bill comes out of this process is going to tame some of the crypto market’s more wild features. But it may not be as strict or raise as much money as some on the pro-regulation side would hope. It’s always tempting to make fun of crypto bros. It’s clear, though, that they’ve learned to flex some lobbying muscle.

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