The US $ 1 trillion infrastructure bill, signed by President Joe Biden last week, contains provisions that would tax cryptocurrency trading and make money for the US government $ 2.8 billion per year.
Frankly, that’s not a lot of money.
The problem is that the crypto control of the law is not clearly worded and the government risks crushing a burgeoning part of the economy.
The Infrastructure Act states that “a brokerage company” must keep an eye on these things. But you can also enter into a smart contract without brokerage. Who is responsible for reporting in this case? Would a miner be considered a broker?
There is no question that the government owes taxes on cryptocurrency trading in some way, as it is on any other investment gain – usually at the time of an individual’s liquidation or as on a transfer of ownership. But the vagueness of the law risks either trading platforms wiping out access for US citizens or simply preventing smaller cryptocurrency investors from joining or staying in the market.
We have seen this before. FATCA, the Foreign Account Tax Compliance Act, caused some financial institutions to prevent US citizens from using their services because the compliance rules were too burdensome in relation to the risk and potential benefit.
Here are a few scenarios – some simple and some complex – that need to be thought out:
- When you buy a car with bitcoin, you are using bitcoin to buy a car when you are taxed. That’s easy enough.
- If you go to a crypto exchange and use dollars to buy ether, figuring out how to tax should be easy. That too is a straightforward transaction.
- When you put your crypto into a smart contract that you use to hold an NFT that other people buy, things get messy quickly and there is a risk of individuals dealing with taxes that have the complexities of a corporate transaction.
The minimum amount is $ 10,000 – a carryover from the Bank Secrecy Act. Transactions below this amount will not be taxed, but $ 10,000 is a relatively small amount of money to deal with a complex tax situation.
Tax reporting for trading platforms and investors can be tedious enough to discourage further investment, which can ultimately render the tax worthless or at least generate far less income than estimated.
And for the IRS, this could be a complex tax to consider. You need a way to link identities to these transactions. This already happens on trading platforms like Coinbase, but individual miners usually don’t.
What is remarkable about this particular bill is that while tax laws will almost always be problematic initially, they tend to be cleared up over time. This infrastructure law seemed to be going in the opposite direction. Congress started with the impact number ($ 1.1 trillion) – and then tried to find ways to generate enough taxes to match that number.
This is unusual in some ways, but perhaps an indication of our current political climate. Politicians used to start with the specific programs they wanted to fund and then try to keep costs as low as possible. This time both parties struggled to promise a larger number than their party was in power. (Trump eventually worked on a $ 2 trillion infrastructure bill, though it never went into effect.)
It is a somewhat weird time politically in the United States when mayors from Miami to New York and across the political spectrum are offering to receive their paychecks in cryptocurrency. At the national level, there are no clear guidelines on the federal government’s long-term plans.
Ultimately, cryptocurrency is here to stay in one form or another, and the federal government needs to take an approach seriously by speaking to experts like economists, academics, and cryptocurrency platform developers.