The $1.2 trillion infrastructure bill awaiting a presidential signature is primed to land a serious blow to the crypto industry. Stricter oversight on digital asset trading has been a goal for the Biden administration and Republican leaders in Congress for some time, and thanks to a controversial cryptocurrency tax rule buried in the bill, they’re going to get it. Crypto advocates are planning to do everything they can before it takes effect in 2024 – and it may just be the Fourth Amendment that saves the day.
The bill will require “cryptocurrency brokers” who regularly provide a service that conducts transfers of digital assets, such as bitcoin or ether, to report all transactions to the International Revenue Service. Such tax provisions will raise $28 billion over ten years to fund the infrastructure deal, according to the joint committee on taxation.
Who or what exactly is considered a “broker” is what the IRS will have to answer – and that’s what has digital currency advocates up in arms. The extremely broad category could include crypto miners, hardware manufacturers, software developers, and other parties who do not actually facilitate transactions directly.
Two attempts to adjust the language died in the Senate and were ignored by lawmakers in August. Amendments would have included removing miners and digital wallet developers from the reporting requirements, but the crypto lobbyists failed to secure unanimous approval.
The tax code passed in 1984, which cracked down on money laundering, will be amended following the president’s signature to include digital asset transactions. The law states that any person engaged in a “trade or business transaction” who received more than $10,000 in cash must report details about the sender to the IRS. That law will now include not just cash transactions, but crypto exchanges as well. All violations will result in mandatory fines and may bring up to five years in prison.
A lobbying group, Proof of Stake Alliance, which supports decentralized technology, has taken major issue with the application of the 1984 tax code to cryptocurrency transactions. In a report released in September, the organization argued that in most cases the person receiving a digital asset is not in a position to report personal information of the sender, such as a name and address. A major component of the digital currency world is anonymity, and this legislation erodes that treasure of the crypto industry.
Abraham Sutherland, a former White House and State Department lawyer and current advisor to Proof of Stake Alliance, included in the report that “This law will kill the technology.” Facing a potential felony and jail time will encourage people to drop their digital assets and “go back to using banks that will report your financial dealings to the government for you.”
1/ Despite our best efforts, the infrastructure bill has passed with the terrible crypto tax reporting provisions. The fight is not over yet, however. We have several paths to continue to pursue a fix.
— Jerry Brito (@jerrybrito) November 6, 2021
Advocates hope independent legislation can be drafted and passed before the new reporting requirements take effect in 2024, and lobbyists have already secured bipartisan support for doing so. Democrats Kyrsten Sinema of Arizona and Mark Warner of Virginia teamed up with Republicans Pat Toomey of Pennsylvania and Rob Portman of Ohio to voice their concerns over this legislation and to support amending the language.
Following the passage of the infrastructure bill last Friday, Kristin Smith, an executive director at the Blockchain Association, warned that the “sleeping crypto giant” is ready to defend itself against the IRS. The Treasury Department has attempted to reassure industry representatives that once the bill is signed into law, they will form rules that exempt miners and other parties such as makers of digital wallets.
We may have lost the battle to remove these provisions from BIF, but this fight jolted a sleeping crypto giant.
We’ll have more resources, more brilliant minds and more boots on the ground to fight harmful regulation + legislation.
Far from defeat, we’re just getting started. https://t.co/52O5yfR46B
— Kristin Smith (@KMSmithDC) November 6, 2021
Coin Center announced it will most likely sue the federal government as soon as the law goes into place in 2024. One legal theory, argued by Coin Center Research Director Peter Van Valkenburgh, is that the law violates Americans’ Fourth Amendment right against unreasonable search and seizure by the government.
Thanks to what’s called the third-party doctrine, which holds that individuals have no reasonable expectation of privacy under the Fourth Amendment when they willingly share information with third parties like banks and ISPs, courts have consistently upheld laws that require these companies to report to the IRS. However, two things give Valkenburgh hope. First, with its 2018 ruling in Carpenter v. the United States, the Supreme Court seemed to roll back the third-party doctrine when it determined that the use of phone records by the police to track a person’s movements over time without a warrant was a violation of the Fourth Amendment. He believes this could provide useful ammunition in the battle against mandatory reporting of cryptocurrency transactions.
On the other hand, one could argue the third-party doctrine simply doesn’t apply to crypto transactions. In Valkenburgh’s opinion, “obligating people on their commercial counterparties in this way is not a third party who’s neutral, it’s one person, spying on or informing on another person.” He concludes that “it’s hard to imagine how we’re supposed to apply the third-party doctrine to a transaction with only two parties.”
Congress, however, clearly believes the government has the authority to require reporting – and the future of cryptocurrency in America likely hangs on which interpretation the courts favor.
~ Read more from Keelin Ferris.