As Senate negotiators work out the final details of a $1 trillion bipartisan infrastructure package, lobbyists for the crypto industry are calling for last-minute revisions to a provision that could fundamentally change how the federal government treats holders of digital assets.
An earlier version of the bill included language that some interpreted as defining nearly all crypto holders as brokers, and thus requiring them to report transaction information to the Internal Revenue Service. While crypto exchanges have long expected a provision of this kind, the possibility that miners, software developers, and other blockchain users could also face reporting requirements seemed unworkable and counter to the industry's focus on privacy and anonymity.
"This has been an ongoing thing, and it's something that quite frankly the industry welcomes," said Kristen Smith, executive director of the Blockchain Association, a trade group with 46 member companies. "The problem was it included this expanded definition of broker that goes well beyond those types of companies that have custodial control over customer funds."
Smith said she thinks initial language was likely an unintentional oversight stemming from a general lack of understanding of decentralized peer-to-peer networks.
The latest version of the bill, which is still not set in stone, clarified that a broker is an entity that provides for the transfer of a digital asset as a service "in exchange for consideration." That last phrase is crucial, because it implies that brokers must have a customer, whom they work for in exchange for a fee. This leaves out other players in the space such as miners and developers.
"There are all these other players in the ecosystem that arguably help effectuate the transfer of a digital asset like miners, wallet providers, software developers, but they don't have customers," Smith said.
The legislative fight isn't over though. Smith and other lobbyists are actively working with lawmakers to work out an amendment to the bill that would further narrow the language.
"It's going to be a pretty intense 12 to 24 hours," she said.
So far, senators from both sides of the aisle have been responsive to the lobbying push.
On Monday, Republican Senator Pat Toomey of Pennsylvania called the provision "unworkable."
"Congress should not rush forward with this hastily-designed tax reporting regime for cryptocurrency, especially without a full understanding of the consequences," he said in a statement. "By including an overly broad definition of broker, the current provision sweeps in non-financial intermediaries like miners, network validators, and other service providers. Moreover, these individuals never take control of a consumer's assets and don't even have the personal-identifying information needed to file a 1099 with the IRS."
Given their overall skepticism about new regulations, Republican support for narrowing the scope of the reporting requirement was less surprising than a full-throated condemnation of the provision from a leading Democrat.
"Americans avoiding paying taxes they owe through cryptocurrency is a real problem that deserves a real solution," Sen. Ron Wyden tweeted on Sunday. "The Republican provision in the bipartisan infrastructure framework isn't close to being that solution. It's an attempt to apply brick and mortar rules to the internet and fails to understand how the technology works."
This doesn't mean lawmakers are fully on board with the industry's ideal regulatory framework. Indeed, Smith noted that no crypto provision at all would be the best outcome.
Others have been even more explicit about their distaste for the current bill's language.
The Electronic Frontier Foundation called it a "disaster for digital privacy."
"Make no mistake: there is a clear and substantial harm in ratcheting up financial surveillance and forcing more actors within the blockchain ecosystem to gather data on users," wrote Rainey Reitman, program officer for the foundation, in a blog post.
Good for Investors
One possible compromise is for lawmakers to zero in on their original target: crypto exchanges.
"It would be nice if they were a little bit more surgical in their definition and focus on exchanges, which was already a widely expected proposed change," said Thomas Cardinale, a tax partner and resident crypto expert at accounting firm Eisner Advisory Group LLC.
Right now, exchanges don't have to issue 1099-Bs to their customers, which leaves investors to calculate their gains and losses on the platform for tax purposes themselves.
Cardinale said new reporting requirements for exchanges would be good for overall tax compliance as well as for crypto investors, who would be "getting a year-end statement showing their gains and losses without them doing all the work to put on their tax returns."
The bill fits into ongoing efforts at the IRS to ramp up income reporting in the crypto space.
As for lawmakers' claims that better reporting from the provision will generate $28 billion in revenue over a decade to help fund infrastructure improvements, the tax expert expressed skepticism.
"This is not going to be a new tax," he said. "This is just an estimate of the amount of new income tax revenue they expect from the anticipated increased compliance. They probably put a lot of assumptions in that number."
Not least of which, he added, is the expectation that crypto prices will continue to rise in the coming 10 years. "To get $28 billion in revenues, you need to have gains."
The Crypto Lobby
In the meantime, the crypto industry is already taking note of its relative success in influencing Congress, which Smith said reflects a growing level of coordination in the sector.
"Even in the past six months, the sophistication and the number of people working on [lobbying for the crypto industry] has changed," she said.
The Blockchain Association has three in-house lobbyists and keeps on retainer three lobbying firms that are available for the kind of full-court press now underway.
Smith said that many of the companies it represents have also started hiring their own in-house lobbyists. "Altogether, there are about two dozen active lobbyists that are working in this space," she said.
