The US cryptocurrency transaction tax proposal imposes a tax on cryptocurrency transactions to raise $28 billion in infrastructure funds

On the evening of the 28th local time, the U.S. Senate held a procedural vote with 67 votes in favor and 32 votes against. Among them, all 50 Democratic members voted in favor and another 17 Republican members voted in favor.

The new infrastructure bill states that it is necessary to raise $28 billion in infrastructure funds by levying taxes on cryptocurrency transactions. Digital asset trading brokers, including securities firms and trading platforms (including centralized and decentralized trading platforms), must submit tax returns to the IRS through a revised information reporting system, mainly for transactions exceeding $10,000.

As soon as the news came out, it attracted attention and discussion in the industry, among which there were many opponents.

Opponents’ views

The infrastructure bill has sparked controversy in the crypto space because it originally defined “broker” very broadly. In the revised and actual bill proposed late Sunday, that definition was slightly toned down as it no longer explicitly includes decentralized exchanges as brokers. But it also doesn’t explicitly exclude crypto miners or node operators.

Jake Chervinsky, general counsel of DeFi lending protocol Compound, commented on this on Twitter: “For non-custodial parties such as miners, it is simply impossible for them to obtain the information needed to fill out the 1099 form. In fact, this may mean a (de facto) ban on mining in the United States. It is illogical to adopt a regulation that is simply impossible to comply with unless its goal is to kill the entire industry.”

The Electronic Frontier Foundation (EFF), a privacy-oriented NGO, has criticized the new infrastructure bill in the United States. The organization outlined reasons why the bill would cause significant damage to the U.S. crypto industry. First, the EFF claims that the bill would lead to more surveillance of cryptocurrency users, which runs counter to the organization's commitment to digital privacy. The EFF said that by defining all crypto-adjacent entities, even those that do not act as custodians of others' crypto, as "brokers" and forcing them to collect users' tax information, the current draft would turn the crypto industry into a "cumbersome surveillance system," the EFF said. This would complicate the legal landscape for crypto projects, the EFF added. The EFF also argued that the bill could make user information more vulnerable to exploitation by malicious actors. Furthermore, the EFF claims that it would be impossible for miners to comply with the bill, and that smart contracts and decentralized exchanges would be affected because the bill introduces uncertainty into peer-to-peer cryptocurrency trading.

Marta Belcher, a cryptocurrency and civil liberties attorney, said: “This bill could make it impossible for people to maintain anonymity while transacting in cryptocurrency directly with others through open source code, such as smart contracts and decentralized exchanges.”

Official Opposition Views

The introduction of the infrastructure bill also aroused opposition from some members of the House of Representatives and the Senate.

Rep. Warren Davidson said in a podcast that the additional compliance costs that the bill would trigger would seriously jeopardize the viability of companies and startups in the Bitcoin space. He lamented that it must have been written by someone who knew nothing about the industry. Davidson spoke about how the bill marks a departure from the United States' long-standing role as a country that leads innovation. He warned that the United States is in danger of missing out on one of the most revolutionary technological advances in history and falling behind our adversaries in this important innovation. "The United States led the industrial revolution, the advent of the automobile, and the development of the internet," Davidson said, "and now the United States is about to lose that leadership to this new technology."

Ron Wyden, chairman of the U.S. Senate Finance Committee, criticized draft measures related to crypto tax reporting requirements in the infrastructure that is still being developed on Twitter last Sunday. Ron Wyden said that Americans evading paying the taxes they owe through cryptocurrencies is a real problem and there should be a real solution. But he believes that the "Republican provisions" are not the solution to the problem. He said he will always push for stricter tax compliance requirements for crypto companies.

U.S. Senator Pat Toomey said in a statement on Monday that Congress should not rush into a hastily designed cryptocurrency tax reporting system, especially without fully understanding the consequences. He believes that the text of the draft legislation is unworkable and plans to propose amendments to fix it.

Advancing the Amendment

The opposition from these lawmakers allowed the infrastructure bill to move forward.

Recently, Ron Wyden, Chairman of the U.S. Senate Finance Committee, and Senators Pat Toomey and Cynthia Lummis have submitted an amendment to the cryptocurrency taxation provisions of the infrastructure bill. The amendment proposes to exclude miners and software developers from the definition of crypto "brokers" so that crypto companies including miners and software developers are excluded from the tax reporting provisions in the bipartisan infrastructure bill.

U.S. Senator Cynthia Lummis of Wyoming tweeted that Senate Finance Committee Chairman Ron Wyden and Senators Pat Toomey and Cynthia Lummis have submitted amendments to the cryptocurrency tax provisions of the infrastructure bill: Digital assets will continue to exist, and while more work needs to be done, the Wyden and Lummis amendments integrate them into the financial system while leaving room for innovation. Financial innovation is bipartisan. We need input from Republicans and Democrats to ensure that we effectively integrate digital assets into our tax code without compromising technology. I look forward to continuing this work as we bring the financial industry into the 21st century.

Support for the Amendment

The proposal of the amendment attracted the attention of the cryptocurrency community and received strong support.

Twitter CEO Jack Dorsey tweeted that he supports the efforts of U.S. Senators Pat Toomey and Ron Wyden to amend the cryptocurrency-related provisions in the infrastructure bill. Dorsey said that the current tax reporting language of the infrastructure bill would impose unworkable requirements on Bitcoin node operators, developers, and miners.

Silicon Valley venture capital firm Andreessen Horowitz (a16z) sent a letter to Senate Majority Leader Schumer and Minority Leader McConnell, expressing support for the amendment to the infrastructure bill by U.S. Senators Wyden, Lummis, and Toomey, saying that the current provisions on taxation of cryptocurrency transactions are too broad and will sweep non-intermediaries such as network validators and software developers, and will stifle innovation by imposing unfeasible reporting requirements on these groups. The scope of the cryptocurrency world goes far beyond its financial origins, including artwork, community development, and new ways to form organizations. As the entire new economy is built on decentralized protocols, these use cases will only continue to grow, and different cryptocurrency uses are subject to different regulatory rules. a16z emphasized that if the bill is not updated in accordance with the amendment, it will run counter to this infrastructure goal. The state can provide an alternative, which is to build a participatory and inclusive infrastructure.

Brian Armstrong, CEO of Coinbase, tweeted that the bipartisan U.S. Senate proposed a new infrastructure bill involving crypto-assets-related provisions that could have a profound negative impact on the U.S. cryptocurrency industry and inadvertently promote more overseas innovation. Policymakers play a key role in ensuring that technological innovation thrives in the United States, and hope that regulation will not impose a heavy burden on the innovative crypto industry in its future development. The bill originally defined "brokers" as anyone who transfers digital assets, which makes no sense, but fortunately, an amendment has been proposed to exclude miners and software developers from the definition of crypto "brokers." In addition, it is hoped that all senators will delete the requirement for comprehensive monitoring of cryptocurrency holders. In addition, the infrastructure bill also provides for comprehensive and unprecedented reporting requirements, which will force exchanges such as Coinbase to monitor their customers' transactions in a more invasive way than other traditional financial institutions. All crypto practitioners ask for is a fair competitive environment with traditional finance, and will not unfairly punish the cryptocurrency industry.

Granted, the infrastructure bill that has been criticized for its introduction has some benefits for cryptocurrencies. While it may be bad for the U.S. crypto industry, the inclusion of tax provisions shows that lawmakers have come to recognize the industry’s durability.

Partisan divide

According to a recent poll released by intelligence firm Morning Consult, 52% of Americans support the controversial cryptocurrency tax reporting provision in the infrastructure bill. However, there is a clear partisan divide on the issue. 34% of Republicans and 15% of Democrats "somewhat oppose" or "strongly oppose" the provision's crackdown on cryptocurrencies.

Regardless of the outcome, it may take several weeks for the plan to be passed. Bloomberg pointed out that although this vote is a procedural vote and does not guarantee that the plan will eventually be passed by the Senate, the result of 17 Republicans and 50 Democrats voting in favor shows that the proposal is likely to receive enough support by then.

In addition, since the U.S. Congress will be in recess from August to September, Bloomberg predicts that the vote to finally pass the proposal may last until this weekend or even next week.