Congress passed a bipartisan $1.2 trillion infrastructure bill on Friday that includes a controversial new cryptocurrency tax requirement, despite months of aggressive lobbying by industry groups as they looked to fend over stricter regulatory oversight.
The House passed the infrastructure package late Friday night in a 228-206 vote, sending the bill to Biden's desk for his signature after months of painstaking negotiations. It's unclear when the president intends to sign the measure.
One of the key revenue-raisers in the bill is an effort to curb tax evasion in cryptocurrency by imposing a series of new tax reporting provisions on the industry that apply to digital assets like cryptocurrency and nonfungible tokens, or NFTs.
In 2018, the IRS cited third-party analysis that suggested the tax gap – the difference between what is owed and what is actually paid – on cryptocurrency capital gains was about $11.5 billion in 2017. But as the Tax Foundation pointed out in an August blog post, it's reasonable to think the deficit has widened since then, given the substantial increase in crypto's market cap. (Under current law, cryptocurrency is treated by the IRS as assets like stock, rather than actual currency).
One new provision in the bill would require brokers to report those transactions for digital assets, such as bitcoin or ether, to the IRS in the shape of a 1099 form. Brokers will also be required to disclose the names and addresses of customers. However, crypto advocates and other critics have argued that as written, the bill's definition of who qualifies as a "broker" is too broader.
Another aspect of the bill would require businesses and exchanges to report when they receive more than $10,000 in cryptocurrency.
But critics worry that as written, the provision’s definition of a "broker" is too broad. Cryptocurrency advocates are concerned that the current language could potentially target those without customers who wouldn’t have access to the information needed to comply. In response to these fears, the U.S. Treasury Department said in August that it will not target non-brokers, such as miners, hardware developers and others.
The proposal defines anyone "responsible for regularly providing services that facilitate the transfers of digital assets, which could end up including people such as software developers and cryptocurrency miners that do not square with what we would conventionally define as brokerage services," the Tax Foundation wrote. "The result could be substantially increased compliance costs for the industry, as well as offshoring, which certainly seems feasible for an industry as virtual as digital currency."
Proponents of the original measure have argued that exempting decentralized exchanges or cryptocurrency miners from reporting requirements could create a "two-tiered cryptocurrency market" and encourage an "unregulated shadow financial market." The non-partisan Joint Committee on Taxation estimated the policy would generate about $28 billion in new revenue over the next decade.
The Treasury Department in August pledged to not target non-brokers, such as miners and hardware developers. However, that promise is no guarantee that future administrations won't go after those individuals.
The provisions are not slated to take effect until January 2024, meaning that cryptocurrency lobbyists will likely push for different legislative avenues to water down the regulation.
Money generated from the stricter regulation will help pay for about $550 billion in new funding over the next decade for roads, bridges, rail, transit, water and other "traditional" infrastructure programs. Other pay-fors in the infrastructure bill include repurposing unspent coronavirus relief funds, along with recouping fraudulently paid unemployment money, unemployment money returned by states that prematurely ended a federal $300-a-week benefit, targeted corporate users fees and economic growth created by the investments.