Sens. Cynthia Lummis, R-Wyo., and Pat Toomey, R-Pa., conduct a news conference on a bipartisan agreement to fix the digital asset reporting requirements in the infrastructure bill, in the U.S. Capitol on Monday, August 9, 2021.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
This week the Senate passed the $1.2 trillion infrastructure bill without any of the proposed amendments on crypto tax reporting that had held it up for about a week.
The cryptocurrency community is a little bruised right now, but the events in Washington weren’t a total loss, experts say. These developments fit into a common theme for the young crypto industry: it suffered a short-term blow that’s likely a victory for those playing the long game.
Although the controversial language is “unworkable and onerous,” said Cowen’s Jaret Seiberg said in a note Tuesday, “the tax reporting language is one of the clearest indications that Washington is prepared to accept crypto as a permanent part of the financial ecosystem. [It] now sees crypto as a real product that is worthy of government attention, [which] tells us that Washington is done looking at ways to end crypto.”
Here’s what the past week’s political drama means for crypto and where the industry goes from here.
What just happened?
Crypto got caught in political theater this week – after it was quietly slipped into the 2,700-page bill as a pay-for provision. Though it couldn’t ultimately stop lawmakers, the digital asset community banded together to protect its members. Industry lobbyists and crypto-friendly senators kept them updated on social media and urged them to make their voices heard.
The issue at the crux of it all had to do with the definition of a crypto “broker,” which was written in language so broad and unspecified one could interpret it to include anyone involved in any kind of crypto transaction. A group of crypto-friendly lawmakers — including Sens. Pat Toomey, R-Pa., and Cynthia Lummis, R-Wyo. — proposed an edit deemed adequate by the industry.
That was quickly countered by another proposal that didn’t quite do the job but won the support of the White House and Treasury Department. Throughout last week the vote on the bill was delayed so lawmakers could wrap their heads around a new and highly complex subject.
On Monday, a compromise amendment was put forth by the senators behind both previous amendment proposals. On Tuesday it was offered on the Senate floor for unanimous consent and rejected, by Sen. Richard Shelby, R-Ala. The reason, he said, is that his unrelated $50 billion defense amendment was blocked. So the infrastructure bill was passed with the original language and the industry is now back at square one.
“[Shelby] could have just objected to the fix,” Seiberg said. “By instead seeking more for defense, he used the amendment to give the GOP a way to attack Democrats for failing to back the troops. It is why we see this as more of a political sideshow than it is a direct attack on crypto.”
In the midst of it all, Sen. Ted Cruz, R-Texas, said he filed a separate amendment to strike the crypto language in the event a bipartisan deal couldn’t be reached.
How bad is this for crypto?
Signage outside the Internal Revenue Service (IRS) headquarters in Washington, D.C.
Bloomberg | Bloomberg | Getty Images
The controversial language in the infrastructure bill requires crypto “brokers” to report customer information including transactions to the Internal Revenue Service. There’s big concern about the ability of certain crypto operators (like miners, stakers and software developers who simply don’t have customers) to comply with this rule.
But it’s not a death blow, said Stephen Palley, a partner at the law firm Anderson Kill and co-chair of its blockchain and virtual currency group.
“Even assuming the whole thing gets through the House, which is anyone’s guess, the language is ambiguous and there’s floor testimony that says that the intent is not to impose reporting requirements on infrastructure providers,” he told CNBC. “Who knows what the implementing regulations would look like, and if bad, they seem likely to be challenged in court.”
The language is so broad it could arguably apply to Internet or telecom service providers, Palley added, and would surely be challenged if applied to groups who don’t actually broker digital assets.
“There is no way the language can be fairly construed to mean that,” he said.
Broker-dealers, prime brokers, asset managers, and exchanges already conduct know-your-customer compliance and tax reporting, so the provisions allow them to carry on business as usual, said Jesse Proudman, CEO and co-founder at crypto roboadvisor Makara. He also noted that support in the market remained strong on Tuesday, when the bill was passed. Bitcoin hovered around $45,000 Tuesday and is back above $46,000 Wednesday morning, according to Coin Metrics.
“Crypto is a creative, entrepreneurial industry, and it will adapt and survive just as other industries have, regardless of the level of regulation,” he said.
What now?
The House isn’t likely to risk the infrastructure package by fixing the crypto language, Seiberg said, but there’ll be opportunities for Congress to do so as part of other legislation, with the most likely next window being when it enacts the defense bill in the fall.
The crypto industry is still likely to put up a fight, however. Reps. Tom Emmer, R-Minn., Darren Soto, D-Fla., David Schweikert, R-Ariz., and Bill Foster, D-Ill. – co-chairs of the Blockchain Caucus – sent a letter on Monday to each member of the House urging them to “fix the crypto pay-for.”
“Cryptocurrency tax reporting is important, but it must be done correctly,” they said in the letter. “When the Infrastructure Investment and Jobs Act comes to the House, we must prioritize amending this language to clearly exempt noncustodial blockchain intermediaries and ensure that civil liberties are protected.”
In any case, the new laws aren’t likely to go into effect until 2023 at the earliest, and a lot can happen in that time, said Leah Wald, CEO at digital asset manager Valkyrie Investments.
“The crypto-specific provisions in the infrastructure bill are concerning over the long-term, but they should not have any real effect in the short-term,” she said. “Since a month in crypto is like a year in normal times, two years is an eternity. And I’m willing to bet this works out far better than most people expect it will.”
