WASHINGTON – In a search for funds to help pay for the Senate’s bipartisan infrastructure package, lawmakers have looked to the cryptocurrency industry as a potential source of tax revenue and are offering a stricter scrutiny of digital transactions.
One provision in the package would require cryptocurrency brokers and investors to provide more disclosures about their transactions to the Internal Revenue Service. The aim is to bring more transparency to an opaque sector, which critics say is a haven for money laundering and tax evasion. But the provision also underscores the realization in Washington that the $ 2 trillion industry is here to stay and offers a new opportunity to generate federal tax revenue.
By strengthening the application of taxes on these digital assets, the federal government could raise $ 28 billion over a decade, according to an estimate by the Joint Committee on Taxation, which analyzed the plan. While this is only a small fraction of the $ 550 billion lawmakers have proposed in new federal infrastructure spending, it is one of the few new sources of revenue included in the plan.
The potential for further scrutiny of crypto transactions by the federal government is pissing off the nerves of the nascent fintech industry, which has so far escaped the kind of rigorous oversight applied to traditional financial services.
“What regulation will come, and from which agencies, is not yet clear, but make no mistake, the regulation is coming for the industry,” Owen Tedford, analyst at Beacon Policy Advisors, wrote in a note to clients on Friday. . “Lawmakers and regulators take cryptocurrency issues seriously and appear poised to make sustained efforts on multiple fronts to bring it out of the shadows.”
Earlier this year, the Biden administration outlined various policy priorities and how they could be used to increase revenue, including subjecting the crypto industry to further scrutiny from the IRS. The administration initially proposed requirements for reporting cryptocurrency transactions as part of its larger initiative to narrow the so-called $ 7 trillion tax gap.
This Treasury Department plan, however, came with additional funding to help the IRS crack down on tax evasion – money the Senate infrastructure package does not include. That could make it harder for an already strapped agency to crack down on a high-tech industry that grew almost overnight.
A Senate draft bill, which the New York Times obtained, has broader language than the Treasury Department’s proposal. The administration’s plan would apply new reporting requirements to cases where taxpayers buy crypto assets from one broker and then transfer them to another broker. This would also apply to companies that have received crypto assets worth more than $ 10,000. According to Treasury estimates, this proposal would generate a “negligible” amount of revenue.
The Senate bill, which may still change, offers similar reporting requirements but includes a broader definition of a cryptocurrency broker to refer to anyone who facilitates digital asset transfers.
Some cryptocurrency brokers already report their transactions to the IRS, but most do not due to the ambiguity of the applicable law.
The cryptocurrency industry argues that it wants more regulatory clarity, but some of its members warn that the far-reaching definition of a broker could have unintended consequences.
Perianne Boring, president of the Digital Chamber of Commerce, a lobby group, said the legislation was being drafted too quickly. She argued that by defining cryptocurrency brokers so broadly, it could impose disclosure requirements on everyone involved in the industry, from “miners” who earn digital money to developers of. technologies and investors.
According to Boring, impose regulations on industry participants that they might not be able to undermine the purpose of the bill.
“It can have a pretty big impact on the development of some of the most important areas of innovation or will probably kill part of the industry or take it overseas,” she said. “We should embrace this technology, not regulate it so that it doesn’t exist.”
Drew Nirenberg, spokesman for Senator Rob Portman, the Republican from Ohio who helped draft the legislation, pushed back against the idea that the proposed rules would hurt the industry.
This legislative language does not redefine digital assets or cryptocurrency as ‘security’ for tax purposes, attack the privacy of individual crypto holders, or oblige non-brokers, such as software developers and crypto miners to comply with IRS reporting obligations, ”he said. noted. “It simply clarifies that any person or entity acting as a broker in facilitating transactions for clients and receiving cash must comply with a standard information reporting requirement.”
With regulators circling the industry, cryptocurrency companies have been spouting high-priced lobbyists to help shape the rules ahead.
This week, Senator Elizabeth Warren, Democrat of Massachusetts, sent a letter to Treasury Secretary Janet L. Yellen urging her to mobilize the Financial Stability Oversight Council, which she heads, to coordinate a strategy to “mitigate increasing risks that cryptocurrencies pose to the financial system. ” Ms Warren is particularly concerned about the threat they pose to banks and the growing exposure to cryptocurrencies in investment vehicles such as hedge funds.
Ohio Democrat Senator Sherrod Brown issued a stern cryptocurrency warning during a Senate Banking Committee hearing on Tuesday.
“There is nothing ‘democratic’ or ‘transparent’ about a shady and diffuse network of funny money online,” Brown said. “After a decade of experience with these technologies, it seems safe to say that the vast majority have been good for no one other than their creators.”
Top U.S. financial regulators met this month to discuss stablecoins, asset-backed digital currencies that are exploding in popularity so quickly the government is struggling to keep up – and the risks they pose to the system. financial and national security.
Implementing new cryptocurrency reporting requirements wouldn’t be easy, and it’s not clear that they would increase the amount of revenue lawmakers are hoping for. Such calculations are difficult because the Joint Committee on Taxation or other organizations must base them on estimates of the size of the industry.
Eric Hylton, former executive director of international operations for the IRS’s criminal investigations division, said shedding more light on the cryptocurrency world would go a long way in reducing the tax gap.
“Insight will be beneficial when it comes to people trying to hide their income,” Mr. Hylton said. “I think it would be a huge win for everyone in the tax ecosystem.”