Infrastructure Bill Threatens Cryptocurrency Ecosystem: Why Is Crypto Being Targeted With More Tax Reporting Burdens Than Traditional Finance?

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The Senate is poised to vote on an infrastructure bill containing tax-reporting “revenue” provisions that could have devastating effects on the business model of cryptocurrency products and services. The crypto community is rightly outraged over sweeping language that could harm not just cryptocurrency exchanges such as Coinbase (COIN), but the software developers and other small entrepreneurs that keep the cryptocurrency “infrastructure” – or ecosystem – going.

The provisions of the bill – entitled the Infrastructure Investment and Jobs Act — go far beyond merely requiring cryptocurrency brokers to follow similar tax reporting rules for brokers of other financial assets like stocks, as proponents claim.

Since 2011, traditional brokerage firms have been required to report capital gains and losses to the government and send 1099 tax forms to the individual customers. Yet a comparison of the tax reporting requirements for traditional brokers and the broad language that would govern crypto in this bill show the latter provisions are far more extensive and intrusive in both definition of “broker” and the information that must be reported. 

First, there is a much broader definition of “brokers” in the infrastructure bill. In the legislation requiring tax reporting for traditional financial assets, which passed as part of the Trouble Asset Relief Program (TARP) bailout of 2008, “broker” is defined relatively narrowly as a firm that deals directly with a customer. In that legislation and other provisions of tax law known as the “tax code”, a “broker” is defined as “a dealer, a barter exchange [which is defined elsewhere in the tax code as “any organization of members providing property or services who jointly contract to trade or barter such property or services”] and any other person who (for a consideration) regularly acts as a middleman with respect to property or services.”

By contrast, the infrastructure bill provisions on tax reporting include in the definition of a broker (on page 2434 of the embedded PDF file of the bill) “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Thus, unlike the provisions of the tax code governing traditional financial assets, these rules could lump in as “brokers” of cryptocurrency or “digital assets” – depending on the interpretation of those running the Treasury Department and Internal Revenue Service (IRS) – a vast array of individuals who provide services but do not interact directly with cryptocurrency customers.

“The broad, confusing language leaves open a door for almost any entity within the cryptocurrency ecosystem to be considered a ‘broker’—including software developers and cryptocurrency startups that aren’t custodying or controlling assets on behalf of their users,” observes the liberal-leaning civil liberties group the Electronic Frontier Foundation.

Read the full article at Forbes.