How A Sneaky Crypto Crackdown Plot Blew Up the Infrastructure Bill
There’s a lot to dislike about the so-called “infrastructure bill.” It’s a trillion-dollar spending package in a time of creeping inflation. Much of it has nothing to do with “infrastructure” at all, but is more like a dream Democrat spending bill with a grab bag of hobby horse handouts. And now, the fate of this financial free-for-all-insiders hangs in the midnight balance over a legislative dispute over cryptocurrency consensus mechanisms. Serves them right!
Congress still cares a bit that their spending bills appear to budget neutral—on paper, at least. So staffers worked hard to shake out the federal couch cushions for any kind of loose change revenue sources that might make the infrastructure bill appear to be less of a debt-fueled going-out-of-business bonanza. Crypto is hot. Crypto makes money. Crypto is…weird. No one will notice. Why not slice up this digital cash cow? Should be worth at least a cool $30 bil.
It should be noted from the start that cryptocurrency is already taxed. It has been considered a property for federal tax purposes since 2014, which means that users are subject to capital gains taxes. Users must keep track of the dollar value price of a cryptocurrency when they purchase it and again when they sell it, then pay a tax on any appreciation in the interim.
It’s not ideal, as it makes everyday purchases a pain in the butt to track for no good reason. And policy analysts have repeatedly asked the IRS to clarify important questions on the tax treatment of cryptocurrency for years, to no avail.
And yet the feds act surprised when they report that cryptocurrency taxes are underpaid by some tens of billions of dollars a year. The IRS could have saved itself a lot of postage from sending thousands of letters to cryptocurrency users warning them of tax obligations by just rationalizing their rules.
Enter the “Infrastructure Investment and Jobs Act.” Go ahead and flip to page 2,434.
The original bill text stated that any “broker” of digital assets would be required to “make a return for such calendar year…showing [the required information]” for tax purposes—in other words, issue 1099 forms to customers.
That would not be controversial if it only applied to entities like exchanges that act like middlemen or brokers in the traditional sense. (In fact, exchanges have been begging for some kind of tax clarity for years.) This simple approach might even help the feds pretend like their spending package was “revenue neutral” by scrounging up more couch satoshis.
But the bill used an extremely broad definition of broker: “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” When it comes to cryptocurrency, that could mean basically anyone who runs or builds network software—not brokers by any stretch of the imagination.
Consider miners who add new transactions to the blockchain. They do this using what’s called a consensus mechanism like “proof of work” or “proof of stake”—basically the rules about how new entries get stored in the ledger of transactions. These miners “effectuate transfers of digital assets on behalf of another person.” So do software developers who build the tools that people use to transact. This loose language could even ensnare higher layer tools like the Lightning network that allows instant bitcoin payments. These are clearly not “brokers,” yet they would be treated as such by this law.
The problem here isn’t primarily tax burden, since these entities wouldn’t be paying a tax. It’s a surveillance burden. All kinds of non-brokers would be legally required t
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