A breakdown of the new crypto tax the U.S. has put in place.
On November 10, 2021, the U.S. passed a US$1.2 trillion infrastructure bill. The bill, or the Infrastructure Investment and Jobs Act, will ramp up government spending on public infrastructure like roads, bridges as well as water and broadband. The law was passed with a bipartisan vote of 69 to 30.
While all of these planned expenditures are good, there is one aspect of this law that has people worried. The infrastructure bill 2021 specifies tax reporting requirements for digital assets, like cryptocurrencies and non-fungible tokens (NFTs). This part of the law has received backlash. In fact, U.S. Senator Ted Cruz even calls the bill “a devastating attack on the crypto industry”. Let’s dive deeper into how this law will affect the crypto world.
Unclear definition of “broker”
The law requires brokers to report trader information for transactions above US$10,000 to the Internal Revenue Service (IRS). What concerns the crypto community about this aspect of the law is how the term “broker” is left unclear. The law defines “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”. Experts think that the lack of clarity on the term means that it does not only include crypto exchanges, like Coinbase, but also miners and wallet developers. The law doesn’t take into account the transactions done without a crypto exchange, wherein the miner might end up being considered the broker.
Another problem with this is that it gives the IRS an inaccurate amount of information about trading activity. This is because the IRS will be relying on crypto exchanges for the information, and the exchange itself has limited insight into what investors have paid for their crypto in the first place.
Amendment of tax code section 6050I
The second aspect of this law that has made crypto and NFT investors nervous is that it seeks to amend the U.S. tax code section 6050I. This code requires recipients of over US$10,000 in cash transactions to verify the sender’s personal information. This personal information includes the sender’s social security number and the nature of the transaction, among other things. The recipient is expected to report these details to the government within 15 days.
This, however, is simply not possible for crypto traders. This is because while crypto transactions are totally transparent and traceable, they are done through digital addresses. One person can own several addresses without any personal information linking them together. The cherry on top is that 6050I violations are a felony. With it being so hard to report transactions, a lot of traders could inadvertently end up becoming felons. This aspect of the bill also raises concerns about privacy and surveillance.
These developments are not coming out of thin air. Crypto reporting requirements have been in the works as Biden has made them a priority in the 2022 budget. This bill in particular, though, will not come into effect until January 1, 2023, which means that there will be no reporting until 2024. In the meantime, crypto-lobbyists intend to push for amendments to adjust the provisions of this bill.
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