Is the US Senate trying to kill crypto?
In recent weeks we have witnessed an unprecedented debate over the $1 trillion infrastructure bill in the US which has divided lawmakers and roiled the cryptocurrency community. In a nutshell, the US government is looking to tap into the huge trading volumes in the digital asset space by introducing new tax reporting requirements for cryptocurrency brokers which would seek to identify billions of dollars in potential taxable revenue to cover President Biden’s ambitious spending plans on new roads, bridges, and broadband.
Some in the crypto community have hit back against the proposal, saying the Senate is trying to kill crypto. Specifically, the definition of “broker” used in the proposal has been described as “unworkable”. Painted with an extremely broad brush, the definition of “brokers” includes software developers and crypto “miners”, which has drawn a great deal of backlash.
In the most recent development, an attempt to find a compromise was blocked in the Senate, shrinking hopes that US policymakers might yet prove to be supportive of digital asset innovation. The amendment would have seen proof-of-work mining and sellers of hardware and software wallets excluded from the bill in an effort to reach a truce with the cryptocurrency community.
As explained by Sen. Pat Toomey, the amendment would have meant that “Only those persons who conduct transactions on exchanges where consumers buy, sell and trade digital assets” would have been subject to the stringent reporting requirements. Alas, this was not to be, which drew fresh criticism from opponents. The bill will now go through the House of Representatives and there have since been more than 41,000 calls made to the House in a last-ditch attempt to pass the amendment through.
What’s in it for the Senate?
The US government stands to generate significant tax revenue from the new tax proposal. It is estimated that it will bring in $28 billion over the next decade, far more than any other tax proposal in the infrastructure bill.
But what do digital assets even have to do with infrastructure? Quite a lot, it turns out. According to the Federal Highway Administration, replacing all of the US bridges defined as structurally deficient would cost $25.6 billion. So, naturally, a $28 billion windfall from crypto-related taxes would be a welcome respite for an administration that has been sinking further and further into debt amid the coronavirus crisis and the seemingly unending monetary stimulus that has been the status quo since 2008.
The US tax authority, the Internal Revenue Service (IRS), defines cryptocurrency as property which means that purchases and sales are subject to capital gains tax, rather than income tax (though if you are paid in cryptocurrency you may not be exempt). This means short-term capital gains made by buying and selling an asset within a 365-day period could incur up to 37% in tax, while the headline capital gains rate for long-term assets is 20% or lower.
The proposal is not set in stone yet. As mentioned above, it still has to be approved by the House of Representatives, which is under a lot of pressure to reconsider the amendments that were shut down by the Senate. And even then, the regulation could be challenged further in court.
Whatever the outcome, one thing is clear: fervent members of the cryptocurrency community will resist any attempts to broad brush the entire community. After all, for many that fall under the definition of “broker”, providing the information required to comply with more stringent tax regulations is not just impractical, but simply unworkable in its current form.
So what can we expect to happen now? Opponents of the bill are predicting that if it’s passed, it will not only stifle innovation in the US financial services sector but send many crypto companies running for the door. After all, there are other jurisdictions that offer a more favorable landscape and see the rise of digital assets as a positive for the economy. While the bill is not expected to be implemented until early 2023, in an industry that innovates at such a rapid pace the change could be felt sooner.
This wouldn’t be the first time well-intended regulations forced those working in digital assets to take drastic measures. A recent crackdown on cryptocurrency mining in China, which had accounted for some 60% of global crypto mining, saw miners rushing for the exit in droves. Bordering Kazakhstan and Russia are said to be benefiting as miners relocate.
Could we see something similar happening in the US if the infrastructure bill gets passed in its current form? There is no reason why not, although to date there has been an equal shift towards incentivising digital asset infrastructure services within a number of states, not least Florida and Wyoming as active supporters of this changing landscape. With this in mind, if the bill is passed as it stands, it would produce short-term gains, but potentially longer-term pain as the US could be in danger of missing out on leading this shift towards digital asset innovation in the years to come.
That is not to say that digital assets should remain outside of accepted legal frameworks. There is a way for digital assets to be taxed and regulated that can bring positives to all the parties involved: greater transparency, accountability, and security.
However, instead of passing legislation that may inadvertently harm the growth of digital asset innovation in the US, lawmakers should instead look to find a way to work together with the community to help digital assets thrive. Some US politicians have already spoken out in support of digital assets, including Governor Jared Polis, who was the first politician to accept campaign donations in Bitcoin and wants Colorado to accept crypto for state taxes.
One positive take away from all this, however, is that US lawmakers are clearly starting to take cryptocurrency seriously. Despite Gary Gensler, chairman of the Securities and Exchange Commission (SEC), calling it the “Wild West”, the reality is far from it. Digital assets are finally being recognized as a legitimate part of the financial ecosystem, and that, at least, is welcome news.