Following a major setback yesterday, there is still hope that onerous new tax requirements for the cryptocurrency industry can be addressed before they become law.
That’s the upshot from a day of frustration on the floor of the U.S. Senate when the crypto community got a crash course in the vicissitudes of Washington. Ever since President Biden’s $1 trillion infrastructure spending bill proposed taxing cryptocurrency transactions as an offset, senators on both sides of the aisle have been scrambling to limit the damage. No sooner had a bipartisan compromise been struck with White House support, than Sen. Richard Shelby (R-Ala.) rejected the amendment.
Barring an eleventh-hour development, it will be up to lawmakers in the House of Representatives to fix a provision that could force players ranging from protocol developers to miners to stakers to exchanges to collect and report their customers’ crypto transactions to the Internal Revenue Service. That would be a costly, administrative nightmare, they say.
“Washington politics prevailed over common sense today,” said Kristin Smith, the executive director of the Blockchain Association, a trade group that represents Aave, Compound, Circle, and dozens of other leading DeFi ventures. “As written, the infrastructure bill contains harmful IRS reporting requirements that many in the crypto ecosystem lack the capabilities to comply with. As a result, many crypto players will be forced to move overseas, leaving future jobs and economic growth on the table.”
Shelby’s move was so deflating because over the weekend a group of Democratic and Republican senators pulled off something rare — they worked together and hammered out a solution to the problem. Even GOP firebrand Ted Cruz of Texas threw his support to an amendment that would have essentially limited tax reporting duties to brokerages, which tend to be well-equipped to provide clients with 1099s and other forms for the IRS. Leading crypto voices ranging from Tyler Winklevoss to Kiss rocker Gene Simmons had hailed the deal.
Yet Shelby, an 87-year-old, six-term senator who is retiring next year, insisted on raising defense spending as part of the infrastructure bill in tandem with the crypto amendment. That drew objections from Sen. Bernie Sanders (D-Vt.), prompting Shelby to put the kibosh on other amendments and leaving the bill in its original form.
The reaction from the DeFi community was swift and emotional. “Jfc, is this really what it comes down to?” tweeted ChainLinkGod, a crypto influencer with 101K followers on Twitter. “One boomer already halfway out the door f*cking over everyone else over something completely unrelated?”
Deep Donor Ties
Automated market maker Curve Finance weighed in, too: “R.I.P. America. You had nearly 100 years of economic prosperity. Sen. Shelby single-handedly ends that.”
Others noted that Shelby has long been a favored recipient of Wall Street’s largesse. Commercial banks and securities firms gave his campaigns more than $1M between 2015 and 2020, according to opensecrets.org which tracks campaign contributions. “Sen. Shelby’s objection had nothing to do with defense provisions, but rather Wall Street objections where he has deep donor ties,” tweeted Ryan Selkis, the co-founder and CEO of Messari, the crypto data intel outfit.
Jack Dorsey, the CEO of both Twitter and payment app Square and a big Bitcoin supporter, didn’t sugarcoat the implications of the tax provision. “Forcing reporting rules on Americans who develop hardware and software, who mine and secure the network, or who run nodes to build resilience and efficiencies, is an impossible ask that will only drive development and operation of this critical technology outside of the US,” he tweeted.
Dorsey proposed a simple definition for a broker — a fiat-to-crypto exchange. This would only mean platforms that handle USD and other traditional currencies would have to file 1099 forms to report miscellaneous types of income outside of salaries and wages. That would pose a major adoption challenge for most decentralized exchanges, because, true to their nature, they don’t actually take custody of assets and don’t need to record their users’ names.
Still, Brian Krogsgard, co-founder of DeFi analytics company FlipMetrics, urged crypto supporters to rally. “I think some intelligent lawmakers from both sides of the aisle will give it their best shot to improve the outcome for crypto innovation even if the worst language is what passes in the bill,” Krogsgard, the co-host of crypto podcast UpOnly, told The Defiant. “Any candidate for any office should be thinking deeply about their approach to crypto and modern financial technology.”
Unclear and Unworkable
Indeed, the House Blockchain Caucus, a bipartisan group of representatives, swung into action yesterday with a vow to address the provision’s broad definition of entities that would have reporting duties. And Smith, the head of the Blockchain Association, said its members, which also include Uniswap, Maker and Grayscale, were going to the barricades.
“Today’s setback isn’t the end,” she said in a Twitter thread on Monday. “Our 46 member organizations look forward to engaging with members of the House of Representatives to ensure the unclear and unworkable aspects of this provision are removed once and for all.”
The problem is that any changes to the infrastructure bill in the House may require it to be resubmitted to the Senate for approval. But at this point Defiers will be happy to cross that bridge when they get to it.