Last week’s inaugural Bitcoin Policy Summit covered everything from Bitcoin’s energy use to the state of regulatory clarity. On a panel that could have been an entire conference on its own, I had the honor of speaking alongside Sam Abbassi, Thomas Hogan, Amena Ross, and David Spencer on how legislation is affecting Bitcoin. My focus was on the Infrastructure Act—an issue that spurred a wave of opposition and yet has largely been forgotten in the 18 months since its passage.
With that in mind, I wanted to take a moment to feature the problems with the Infrastructure Act that I discussed at the summit: namely, the problems with the broker definition and 6050I transaction reporting. Unfortunately, it’s no exaggeration to say that these two provisions amount to a de facto ban on cryptocurrency mining and what’s likely an unconstitutional level of financial surveillance.
The Broker Definition
The piece of the Infrastructure Act that caught the most attention in the fall of 2021 was the change to the “broker definition,” or 26 U.S. Code § 6045. In short, the change defined, for the first time, cryptocurrency miners and even software developers as brokers under the law. Beginning in 2024, the law will require said “brokers” to report the name and address of each person, or “customer,” they interact with.
As Senator Ted Cruz (R‑TX) rightly warned at the Bitcoin Policy Summit, “If the Treasury enforces that language vigorously, it has the potential to wreak utter havoc for Bitcoin and crypto writ large.” The problem is that this provision is essentially a prohibition on cryptocurrency mining in the United States because it requires miners to report information that they simply do not have access to. By creating a standard that is impossible to comply with, it effectively says miners and developers are not welcome in the United States.
6050I Transaction Reporting
The Infrastructure Act also included a change to 26 U.S. Code § 6050I that will require anyone engaged in a business transaction of $10,000 or more in cryptocurrency to report the transaction to the Internal Revenue Service (IRS). The report must include the name and address of the payer, as well as their taxpayer identification number, the amount paid, the date, and the nature of the transaction. Failure to file a report within 15 days, reporting incorrect information, or filing a report with missing information may result in a $25,000 fine or five years in prison.
This level of mandatory reporting is arguably a violation of the Fourth Amendment, considering it requires two individuals to report each other’s private information to the federal government. To make matters worse, the law is also likely a violation of the First Amendment, considering it will force politically active organizations (e.g., think tanks and charities) to create and report lists of their donors. In fact, it’s for both of these reasons that Coin Center currently has an ongoing lawsuit against the Treasury Department.
Adding Insult to Injury
My fellow panelist at the Bitcoin Policy Summit, David Spencer, described the reality of the situation well when he said, “If the rules don’t make sense[,] if I have to give you information that does not exist[, and] if the rules are impossible to abide by, that’s a problem.” And he went further to say it almost seems as if “nobody has thought about what it’s actually going to take to make this happen.” In fact, this sentiment was echoed earlier in the summit when Senator Cruz described the cryptocurrency provisions as something that “was put into the bill with very few people having any awareness of what they were doing [or] what the consequences would be.” Unfortunately, neither Spencer nor Senator Cruz was exaggerating. Considering the tax revenue projections of the law have since been revised down significantly and the law itself failed to account for other portions of the U.S. code, it seems that there was little thought behind the provisions.
Originally, the Joint Committee on Taxation (JCT) estimated that the provisions would yield over $27 billion in new tax revenue over the next ten years. It was this estimate that made the provisions so hard to remove, considering Congress desperately needed tax revenue to offset the spending in the Infrastructure Act.
The problem is that this estimate appears to have been pulled out of thin air. I originally had many objections that I brought to the JCT in 2021. For example, it made little sense to argue that the law would increase tax revenue while simultaneously setting a de facto ban on some of the legal activities it plans to tax. However, it wasn’t until 2022 (after the law was passed) that the federal government appeared to have addressed those objections. In stark contrast to the JCT’s $27 billion prediction, the White House estimated that only $2 billion would be received from cryptocurrency tax revenue over the same ten‐year period (Figure 1). In other words, the Biden administration revised the estimated tax revenue down to just 10 percent of the JCT’s original projection.
To make matters worse, Abraham Sutherland has pointed out that the policymakers that drafted the cryptocurrency provisions failed to recognize that 26 U.S. Code § 6050I has a companion law in 31 U.S. Code § 5331—a similar reporting requirement under the Bank Secrecy Act. Without any update to the Bank Secrecy Act’s reporting, it’s unclear how the reporting requirements are actually going to function in practice because there will be two conflicting reporting requirements. Setting aside whether the omission was out of ignorance or an attempt to slip the provisions through without notice, the clash in the law should have been addressed by lawmakers before the law was enacted.
Looking Forward
The IRS’s decision to put the reporting requirements on hold until 2024 was a wise one. However, Congress, the cryptocurrency industry, and the broader public should not mistake this reprieve for a solution to the underlying problem. The reporting requirements are unjustified and likely even unconstitutional, but they are very much alive.
Luckily, fixing the issue is not a matter of starting from scratch, and there even seems to be bipartisan support in the Senate. Senator Cruz reintroduced his bill to fully repeal both of the cryptocurrency provisions in the Infrastructure Act. In the House, Representatives Patrick McHenry (R‑NC) and Ritchie Torres (D‑NY) reintroduced the Keep Innovation in America Act to redefine the broker definition to exclude miners and developers, repeal the 6050I reporting requirement, and require the Department of the Treasury to conduct a study of the effect of implementing the 6050I reporting requirement.
While there’s room for debate on both approaches, let’s just hope a decision can be made before the two‐year anniversary of the law on November 15, 2023, or before the reporting requirements officially go into effect on January 1, 2024.
Further Reading:
The Infrastructure Investment and Jobs Act’s Attack on Crypto: Questioning the Rationale for the Cryptocurrency Provisions, November 15, 2021
New Legislation May Fix Cryptocurrency Provisions, November 19, 2021
Can Taxing Cryptocurrencies Really Add $28 Billion to the Budget?, December 22, 2021
Biden’s Budget Calls Infrastructure Act’s Crypto Taxes into Question, March 29, 2022
Cryptocurrency in the Shadow of the Infrastructure Act: An Update, June 13, 2022
Infrastructure Act’s Cryptocurrency Reporting on Hold, Says IRS, January 4, 2023