Oliver Ray Duke – One of the Biden Administration’s key agenda items is H.R. 3684, otherwise known as the “Infrastructure Investment and Jobs Act” (the “Infrastructure Bill”). According to President Biden’s Statement of Administrative Policy, the Infrastructure Bill seeks to rebuild deteriorating infrastructure, reduce greenhouse gas emissions, and invest in underserved communities among other legislative priorities.
One particular offset provision aimed at reducing the financial burden of the Infrastructure Bill set the cryptocurrency community ablaze. This provision expands the pool of cryptocurrency users who may be subject to I.R.S. reporting requirements.
Section 80603 of the Infrastructure Bill proposes amendments to Section 6045 of the Internal Revenue Code (the “Code”) that enlarges the definition of the term “broker” within the meaning of the Code and expands tax reporting requirements for those “brokers.” Section 80603 of the Infrastructure Bill will amend Section 6045(c)(1) of the Code as follows:
(c) . . . For purposes of this section— (1) . . . The term “broker” includes— (A) a dealer, (B) a barter exchange, (C) any person who (for consideration) regularly acts as a middleman with respect to property or services, and (D) any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.
Effectively, subsection (D), as amended, will not only encompass decentralized digital asset exchanges but will likely include persons and entities that “effectuat[e]” digital asset transactions and transfers such as miners, validators, and entities that serve as custodians (or otherwise provide hardware or software) for cryptocurrency holders’ private keys. The amended provisions are expected to raise $28 billion in increased tax revenue. According to the Infrastructure Bill, the provisions, if retained, will apply to filed returns after December 31, 2023.
According to a 2020 report by Markets and Markets, “[t]he global blockchain market size is expected to grow from USD 3.0 billion in 2020 to USD 39.7 billion by 2025, at an impressive Compound Annual Growth Rate (CAGR) of 67.3% during 2020–2025.” This report does not account for the total value or expected growth of digital assets or the growth of other necessary components that support the industry, such as public-key services.
Predictably, the proposed provisions sparked outrage among the cryptocurrency industry and some elected officials on both sides of the aisle. The CEO of Coinbase, Brian Armstrong, described the provisions as “hastily conceived,” carrying the potential to have a “profound negative impact” on the burgeoning cryptocurrency industry in the United States. However, according to a Treasury official, expanded reporting requirements will only “extend to those able to comply, like certain decentralized exchanges.” Still, such assurances have not assuaged the fears of those in the cryptocurrency space like Executive Director of Coin Center, Jerry Britto. In a Twitter thread, Britto expressed his skepticism of the Treasury official’s assurance, questioning why such an expansion of the term “broker,” within the meaning of the Code, is necessary if the Treasury has no intention to effectuate the provision in its full force.
Presumably, upon the Bill’s passage, the cryptocurrency industry will have to wait and see if the Treasury Department decides to enforce the expansion to Section 6045(c)(1) of the Code to its fullest extent. Indeed, some aspects of the proposed expanded provision will ease the burden on the I.R.S. and S.E.C. to regulate and discipline individuals and entities that, for example, issue security tokens through unregistered or fraudulent offerings.
Still, regulators may easily be able to apply the broadened definition of “broker” within the meaning of the Code to proof-of-work digital asset miners, such as the individuals and entities that mine Bitcoin. This application of the broadened regulatory language would effectively pick winners and losers by hamstringing projects with proof-of-work protocols. Do proof-of-work miners “effectuate” transactions actions by way of minting a block and receiving rewards of newly minted tokens as payment for securing the network, especially where the miner then introduces the newly minted token into the stream of commerce? If Bitcoin, for example, is viewed through the lens of the commodities market, the revised provision would arguably be akin, in some instances, to requiring a sole proprietorship farmer to report to the I.R.S the number of bushels of corn it sells to General Mills. Such a requirement would merely price out the smaller farms while allowing factory farms to benefit from regulatory capture.
Moreover, proof-of-stake validators, who receive rewards for verifying transactions, may also be subject to reporting requirements. But, what about validators who run staking pools? What about the “bagholders” who contribute their assets to these staking pools to earn yield? Are they effectuating transactions? These individuals and entities, at the very least, facilitate thousands of digital asset transactions per day.
Although many positive benefits may arise from tailored cryptocurrency regulation, the growth potential of the digital asset industry should not be encumbered by an imprecise offset provision buried within page 2,433 of an omnibus infrastructure package. It is incumbent upon lawmakers to strictly scrutinize the cost-benefit trade-offs with respect to their proposed public policy. While it is of great importance to hem in increased deficits through offset measures in omnibus packages, lawmakers must consider the ramifications of their decisions on an industry that has the potential to reshape society’s common understanding of banking, privacy, and data storage among others. It would behoove our lawmakers to act with precision and specific legislative intent when tampering with potentially revolutionary technological advancement. If the United States is to maintain innovative dominance in the digital asset industry, lawmakers must steer federal cryptocurrency policy towards specific digital asset regulations that both facilitate growth and protect investors from fraudulent activities.