Published on August 3, 2021
In the past few days, the draft language of the proposed infrastructure bill has been a cause for concern for the bitcoin community and the wider digital asset space. Congress proposed increased reporting requirements for “brokers” of digital assets. The current bill generally defines “digital assets” as “any digital representation of value recorded in a cryptographically secured distributed ledger or similar technology”. The bill also defines a digital asset broker as “any person responsible (for a fee) for regularly providing services that effect transfers of digital assets on behalf of another person”. Prominent members of the Bitcoin community have raised concerns that this definition of “broker” is broad enough to include miners, node operations, and hardware wallet manufacturers. In this case, compliance with the new reporting requirements would be virtually impossible.
In particular, the bill did not redefine or change the tax treatment of Bitcoin and other digital assets. The stated purpose of the legislation is to capture revenue from underreporting taxable events. Legislators are trying to impose mandatory reporting requirements on exchanges which will reduce the administrative burden on the IRS as it enforces existing tax law. A spokesman for US Senator Rob Portman (R.-OH) stated: “[t]Its legal language does not redefine digital assets or cryptocurrency as “security” for tax purposes, violate the privacy of individual crypto owners, or force non-brokers such as software developers and crypto miners to comply with IRS reporting requirements. It simply makes it clear that every natural or legal person who acts as a broker by facilitating trade for customers and accepting cash must comply with a standard information obligation. “
The only way to reconcile the comments from Senator Portman’s office with the actual text of the bill is to conclude that members of Congress did not fully appreciate the complexities and nuances of the technology they are trying to regulate . One can interpret the hasty and clumsy formulation as a sign that the political decision-makers are not fully informed about the unintended consequences of the application of “building block and mortar” rules in this area. It’s another sign that there is a massive information gap between the Bitcoin community and members of Congress. The legislator has proposed a definition of “broker” that is more suitable for a past time. What does it mean to “make transfers of digital assets on behalf of someone else” when using distributed ledger technology? There is no indication that Congress carefully considered who or what “causes” a transfer of a digital asset.
Since the original draft was published, elected officials such as US Senator Pat Toomey (R-PA) and US Senator Ron Wyden (D-OR) have stated that they intend to offer an amendment to the bill to clarify the definition of broker . The exact language of this change is not yet available.
Even assuming that more precise language can be included to ensure that critical elements of the Bitcoin ecosystem are not affected by the Infrastructure Act, this episode illustrates the need for members of the Bitcoin community to engage with policy makers in the years to come Stay in contact. As Bitcoin adoption continues to grow exponentially, there will be more situations where the Bitcoin community needs to raise its voice. Issues like a de minimis tax exemption are more likely to be implemented if Bitcoiners regularly raise their voices on Capitol Hill and with local policymakers across the country. According to an estimate by the New York Digital Investment Group for 2021, 46 million Americans now have some exposure to Bitcoin. This represents a significant electoral bloc that may very well be a single voter and gives the Bitcoin community the power to influence elections. If unified, single-spending Bitcoin voters have the potential to propose pro-Bitcoin policy in the United States.
Many in the bitcoin community have a healthy amount of skepticism about the idea of soliciting the government for bitcoin-positive legislation. However, it is possible that this latest fire drill on the Infrastructure Act could have been avoided if Bitcoiners had made more consistent efforts to connect with policy makers and spread awareness of how the Bitcoin network works. The Bitcoin community has the potential to fuel the debate and drive adoption through political activism. The only question is whether the community will take advantage of this opportunity.