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Infrastructure bill aims to crack down on cryptocurrency taxes

Posted by Shivali Anand

September 14, 2021    |     5-minute read (886 words)

The U.S. Senate passed a historic $1.2 trillion bipartisan infrastructure plan on August 10 aimed at repairing the country's deteriorating infrastructure. The "Infrastructure Investment and Jobs Act,” currently awaiting a vote in the House, would allocate $550 billion in additional government spending for roads, telecommunications and utilities.

The bill proposes spending $110 billion on roads, bridges and major projects, as well as $65 billion to rebuild the electric grid, $66 billion on passenger and freight rail, $65 billion to expand broadband internet access, $7.5 billion to build a national network of electric vehicle charging infrastructure, and $39 billion to modernize and expand transit systems. It also contains $55 billion for water infrastructure, $15 billion of which will replace lead pipes, among other things.

Aside from repairing infrastructure, one section of the act in particular is generating a significant buzz: cryptocurrency and its tax implications. A section of the pending legislation would apply new rules to bitcoin brokers that require them to "make a return" by distributing earnings to their clients. This would prompt the IRS to more efficiently collect tax income from individuals who trade in digital assets.

Why is cryptocurrency part of an infrastructure bill?

To help pay for the infrastructure package, the Senate is calling for the crypto measure to impose stricter controls on how digital assets are taxed. Cryptocurrency brokers would be required to provide precise information regarding transactions, such as the price points at which customers purchased and sold. This would be in addition to the obligation to disclose transactions worth more than $10,000 to the IRS.

Although lobbyists worked to reduce the bill's digital currency tax regulations, House Democrats voted August 24 to prohibit any changes from being considered for the bill. This means that the crypto tax is unlikely to be repealed and that industry advocates will have to find new ways to influence legislation.

The provision’s definition of a broker has also raised some eyebrows in the crypto industry. In the bill, a broker is defined as "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."

According to cryptocurrency proponents, this definition of a broker is overly broad, and may ensnare people like crypto miners, software developers, stakers, and others who don't have clients or access to information needed to comply with the regulations because they are not brokers.

 What are the tax implications?

Currently, investors must use Form 1099-B to report virtual currency activities on their tax returns, but bitcoin brokers are excluded. Some cryptocurrency exchanges will produce a 1099-K form for this reason, but it will not include the initial purchase price.

All of this information is necessary for determining the profit rate and applying capital gains tax. As a result of the IRS not having access to the essential information, some bitcoin transactions go untaxed. The current infrastructure bill would change this with a "pay for" clause in which Congress claims it can collect $28 billion in additional revenue by extending the reporting requirements for bitcoin brokers and modifying how the IRS taxes digital assets. These rules are being implemented to strengthen the legislation governing the taxation of digital asset sales.

Investors in cryptocurrencies are unhappy with the new tax policy

While most people agree that brokers and digital asset exchanges should comply with reporting requirements and that those who earn capital gains should pay taxes, the new bill expands the definition of a broker to include virtually all types of industry participants, including miners, software developers, validators and node operators.

None of these parties, however, is in a position to follow the law. To verify transactions, miners utilize the proof of work technique. They accomplish this by donating processing power in return for bitcoin. However, they are not engaged in enrolling buyers and sellers, and they do not save any information about participants' identities.

Validators confirm transactions using the proof of stake mechanism. Participants anonymously stake their assets to keep the network functioning in this way. They can verify more transactions the more assets they have at risk. They, like miners, do not screen participants' identities.

Traditional cryptocurrency brokers and exchanges, such as Gemini and Coinbase, must abide by new Senate-approved legislation. On the other hand, exchanges are entirely dispersed, with no central authority to identify and publish individual network transactions. They employ a combination of encryption, mathematics and intelligent computer code to fulfill all of the tasks of a financial intermediary but in a decentralized, transparent and highly auditable manner.

As per the Electronic Frontier Foundation, such regulations also raise the question of privacy invasion. "The mandate to collect names, addresses, and transactions of customers means almost every company even tangentially related to cryptocurrency may suddenly be forced to surveil their users," they said in a statement.

Twitter CEO Jack Dorsey also expressed his thoughts on the subject: "Forcing reporting rules on Americans who develop software and hardware, who mine and secure the network, or who run nodes to build resilience and efficiencies, is an impossible task that will only drive development and operation of this critical technology outside the US," he tweeted.

Another digital rights organization, the charity Fight for the Future, asks cryptocurrency enthusiasts to contact their state legislators and reconsider the crypto rules.

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