Last week, the U.S. House of Representatives voted to pass a bipartisan infrastructure bill that contains a controversial cryptocurrency tax reporting requirement. The bill contains a broad definition of "broker" that can have serious implications for the cryptocurrency and Defi industry in future.
One of the key amendments in the bill that stroked fear among the crypto industry is the Tax code section 6050I. Since 1984, section 6050I of the tax code has required businesses and individuals that receive either physical cash or a bank transfer in excess of $10,000 to file Form 8300 and report the sender’s personal information, such as name, address, and Social Security Number to the United States Internal Revenue Service (IRS) within 15 days.
However, there is a slight amendment in the new bill which includes “any digital asset” in the definition of “cash.”
Unlike other tax code violations, violations of 6050I are a felony, and if applied to cryptocurrencies and other digital assets like Non-Fungible Tokens (NFTs), could make it so hard to comply that it has the potential to severely cripple the crypto and Defi industry.
The provision also expands the definition of a “broker,” leading to concerns that IRS might seek to impose broker information reporting requirements on non-broker entities such as software developers and crypto miners. The provision defines a broker as:
"Any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."
That definition may or may not include a crypto-miner in the broader broker definition. Crypto miners are people or groups of people who make use of computers and cryptographic processes to solve complex functions and record data to a public record (ledger) called the blockchain. The process involves validating data blocks and adding transaction records to the blockchain. In return, miners earn cryptocurrencies. Miners are an important part of the decentralised ecosystem as they are the ones responsible for validating transactions. They participate in the validation of every transaction and that includes "transfers of digital assets on behalf of another person". However, miners should not be treated the same as brokers given their roles are completely different.
The bill once made into law could open the way for tighter regulation of cryptocurrency -- something the Biden administration is moving toward as it also pushes for tax compliance. Broadly speaking, this may be a good thing in the long run as these regulations may lead to wider adoption of cryptocurrency and blockchain technology.
Most people still believe that cryptocurrency and Defi are Ponzi schemes with no government regulations and controls. With more stringent laws, crypto and NFTs may become mainstream investment options at par with stocks, bonds, gold and other commodities.
However, the crypto and Defi industry may not be happy with the passing of this bill as it can disrupt the way it operates currently. While most centralized crypto trading exchanges such as Coinbase, Binance etc. require KYC before an individual can commence trading, the build of small and micro-cap coins and NFTs are still traded outside these exchanges using non-custodial wallets. With the new reporting requirements, the process may not be as easy as it has been so far. With the law treating violations as a felony, this could have serious ramifications for the industry.
The bill now goes to U.S. President Joe Biden for his signature and is expected to come into effect in 2023. Whether it's a boon or a bane, in the long run, only time will tell!
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