The $1 trillion US infrastructure bill signed into law by President Joe Biden last week includes provisions that would tax cryptocurrency trades and give some benefits to the US government. $2.8 billion per year,
That is, to be honest, there is not a lot of money.
The point is that the crypto tax element of the law is not clearly spelled out, and the government runs the risk of crushing a growing segment of the economy.
The Infrastructure Bill says that a “brokerage” needs to keep track of these things. But you can enter into a smart contract without brokerage, so who is responsible for reporting in that case? Would a miner be considered a brokerage?
There is no doubt that, at some stage, the government owes taxes accrued from cryptocurrency trading like any other investment gain – usually at the time a person liquidates, or like a transfer of assets. But the ambiguity of the law prevents either trading platforms from accessing US citizens or small cryptocurrency investors from joining or staying in the market.
We’ve seen it before. FATCA, the Foreign Account Tax Compliance Act, prompted some financial institutions to prohibit US citizens from using their services because compliance rules were too cumbersome relative to the risks and potential benefits.
Here are a few scenarios – some simple and some complex – that need to be considered:
- If you buy a car using bitcoin, the amount of time you use bitcoin to buy the car will be when you are taxed. It’s quite easy.
- If you go to a crypto exchange and use dollars to buy ether, it should be easy to figure out how to get taxed. This is also a direct transaction.
- If you transfer your crypto to a smart contract that you are using to hold an NFT that other people buy, things quickly go awry, putting individuals at risk of dealing with taxes including corporate transactions. has complexity.
The minimum is $10,000 – a carryover from the Bank Secrecy Act. Transactions below that amount are not taxed, but $10,000 is a small amount to deal with a complex tax situation.
Tax reporting for trading platforms and investors can be difficult enough to discourage further investment, which could ultimately make the tax wasteful, or at least generate much less revenue than anticipated.
And for the IRS, it can be a complicated tax to audit. They will need a way to create identity for these transactions. This is already done on trading platforms such as Coinbase, but individual miners typically do not.
Something notable about this particular bill is that while tax laws will almost always be problematic initially, they usually become clearer over time. This infrastructure bill was going in the opposite direction. Congress started with the impact number ($1.1 trillion) – and then tried to find ways to generate enough taxes to match the number.
This is unusual in some ways, but perhaps a sign of our current political climate. Politicians would start with the specific programs they wanted to fund, then try to make the cost as small as possible. This time, when his party was in power, both the parties were fighting to make huge promises. (Trump, after all, worked on a $2 trillion infrastructure bill, though it was never signed into law.)
It’s a strange time politically in America, with mayors across the political spectrum from Miami to New York offering to take their paychecks in cryptocurrency. Meanwhile, at the national level, there is no clear guidance on the federal government’s long-term plans.
Ultimately, cryptocurrency is here to stay in one form or another, and the federal government needs to get serious about a approach by talking to experts such as economists, academics and cryptocurrency platform developers.