Here’s how the infrastructure bill targets crypto — and how the industry could fight back

Here’s how the infrastructure bill targets crypto — and how the industry could fight back

The crypto industry has pledged to continue its fight against new tax rules included in the bipartisan infrastructure deal that awaits President Joe Biden’s signature following its passage by the House of Representatives last Friday.

The bill would require any person who regularly provides a service that executes transfers of digital assets, like bitcoin
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or ether
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to report those transactions to the Internal Revenue Service, like securities brokers must do for stock and bond trades today. It would also require businesses to report digital-asset transactions of more than $10,000.

See: Here’s what’s in the bipartisan infrastructure bill — and how it’s paid for

Proponents of the bill argue that it simply provides the government with information that enables it to collect taxes already owed — $28 billion over 10 years, according to an analysis by the Joint Committee on Taxation.

Industry advocates, however, say that the new rules threaten to implicate cryptocurrency miners, developers, technology providers and everyday users, saddling them with mandates to report information of which they are ignorant and threatening them with potential felony convictions and five-year prison terms. Here are the venues where the fight will be waged:

Congress

Crypto lobbyists were nearly able to secure an amendment to legislation before it passed the Senate in August that would have explicitly removed miners and digital asset wallet developers from transaction-reporting requirements, but the changes failed to get the unanimous approval needed in the Senate.

That said, advocates remain hopeful that standalone legislation can be passed that will soften the reporting requirements before they go into effect in 2024. Jerry Brito, executive director of the crypto think tank Coin Center, said on Twitter Friday that he has been in touch with several legislators on this topic.

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There is bipartisan support for amending the rules, with Senate Democrats Kyrsten Sinema of Arizona, Mark Warner of Virginia and Ron Wyden of Oregon, along with Republicans Pat Toomey of Pennsylvania, Cynthia Lummis of Wyoming and Rob Portman of Ohio, all coming out in support of changes to the law. In the House, leaders of the bipartisan blockchain caucus, which counts more than 30 representatives as members, have also come out in favor of amending the language.

The Treasury Department

The legislation gives the IRS significant leeway for interpreting who it will require to report information, and industry representatives will be laser focused on lobbying the agency as it implements the new rules.

Kristin Smith, executive director of the industry group the Blockchain Association, said in a Saturday tweet that “we may have lost the battle to remove these provisions … but this fight jolted a sleeping crypto giant,” that is prepared to defend its interests as the IRS writes new regulations.

One of the central questions the IRS must resolve is who will be considered a “broker” of digital assets and therefore responsible for reporting all crypto transactions to the government.

Treasury Secretary Janet Yellen came out in favor of an amendment to the legislation that would have clearly exempted miners of bitcoin and other digital assets as well as makers of digital wallets used to store crypto tokens, and the IRS has reportedly sought to assure industry representatives that it will write rules that do exempt them once the bill is signed into law.

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“As with all federal rules, after the Treasury Department issues regulations to implement the law, there will be a period during which interested parties can comment and give their view,” wrote Adam Goldberg, an attorney and regulatory expert for IHS Markit, wrote in a recent analysis of the bill. “Broad application would only happen if the Treasury Department takes a very wide view when writing the implementing regulations.”

Aside from defining digital asset “broker,” the IRS must also define what it considers to be a digital asset, as well as create the reporting forms and decide what information must be included on those forms.

The Courts

The industry will not only fight to craft the new rules mandated by the law, but may also seek to have them struck down by the courts.

Some crypto advocates are even more concerned about a provision in the infrastructure bill that would require “businesses” to report any crypto transaction of $10,000 or more, regardless of if they are a broker of digital assets.

“This law will kill the technology,” Abraham Sutherland, a former White House and State Department lawyer and adviser to the Proof of Stake Alliance, which advocates for regulatory clarity in the crypto industry, told MarketWatch in September. “Why would anyone risk a felony transacting with digital assets when you can just go back to using banks that will report your financial dealings to the government for you?

Peter Van Valkenburgh, research director at Coin Center, has said that his organization would likely sue the government once the new requirements go into effect in 2024.

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One legal theory the organization would put forward is the law violates Americans’ Fourth Amendment rights against unreasonable search and seizure by the government. While courts have consistently upheld laws that require third parties, like banks, to report information willingly given to them to the IRS, Van Valekenburgh said in a September interview that recent developments provide hope that this Supreme Court might take a different stance.

One such development was the landmark Supreme Court case Carpenter v. United States, wherein the high court determined that the common police practice of subpoenaing cellphone records to determine the location of potential suspects was a violation of the Fourth Amendment, even though someone voluntarily and implicitly agrees to phone companies accessing that information when they sign up for cellphone service.

This rolling back of the so-called “third-party doctrine” could be helpful in the fight against mandatory reporting of crypto transactions, especially in cases where the IRS requires a business owner to report on his customers that pay for goods and services with crypto, when no third party is involved.

“Obligating people to report on their commercial counterparties in this way is not a third party who’s neutral, it’s really one person, spying on or informing on another person,” Van Valkenburgh said. “It’s hard to imagine how we’re supposed to apply the third party doctrine to a transaction with only two parties.”

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