US President Joe Biden has signed a landmark $1.2 trillion infrastructure bill into law which includes tax reporting provisions that apply to cryptocurrency.
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The legislation will be significant for the crypto industry. As part of its revenue-raising provisions, the infrastructure included new definitions for ‘broker’ among cryptocurrency network participants.
The bill is mainly meant for the IRS to have ‘well defined’ definitions but, ultimately, it risks asking network actors to behave as node operators in order to report identifying information for crypto transactions that they have no way of gathering.
Justin Banon, co-founder of Boson Protocol – a decentralised commerce protocol – stressed the need for “sensible regulation for technology in order to protect consumers and users”.
Banon claims the bill needs to be smart and informed by people who understand the threats, opportunities, and economic implications presented by the technologies themselves.
“In a global economy, regulating through fear and ignorance rather than regulating with understanding will simply drive the next wave of web innovation away from the US to other jurisdictions that are implementing smart and informed regulation,” he said.
Working with governments worldwide is necessary
Dr Amber Ghaddar, co-founder of AllianceBlock, commented that crypto was a new industry with an infrastructure quite different from traditional finance and, therefore, applying the ‘letter of antiquated laws’ and provisions to a new industry showed a lack of understanding from the government.
Still, she stressed this was partly “our fault for not ironically ‘centralising’ our efforts to not only lobby but also explain to key stakeholders how our protocols work”.
“Working in good faith with governments and regulators worldwide is a necessity,” Ghaddar explained.
“We are not here to evade our taxes or launder money as some seem to believe, and it is our duty to be not only at the forefront of the conversation but its main drivers.”
The passage of the infrastructure bill itself could potentially be messy for small investors.
If a DeFi or self custody user transfers a certain amount from their wallet to the exchange, the exchange will consider the dollar amount sent as a sale but it doesn’t know how much the client initially paid for the tokens.
The user can then end up with an overstated 1099-B, forcing them to actually hire an accountant or manually reconcile.
Also, a provision of the bill expands a section of the US tax code which may have dire consequences for privacy. This section requires that businesses and people who receive more than $10k in cash or a cash equivalent to file a report with the IRS, verify the identity of the sender, and include their social security number.
“This could have a detrimental consequence on adoption as noncompliance with this is considered a felony,” Dr Ghaddar added.
“Why would a business or individual take such a risk? As these provisions will not take effect until 2024, we can expect an increase in tools that will help investors calculate and automate their taxes.”
