The debate around a controversial cryptocurrency tax provision in the $1 trillion infrastructure bill passed by the Senate intensified on Monday after senators failed to reach a compromise on an amendment that would have limited the law's reach on the crypto ecosystem.

Section 80603 of the infrastructure bill has a wide-ranging definition of a "broker" that saddles a swath of stakeholders in crypto with financial reporting requirements. The provision aims to raise $28 billion over 10 years to finance the infrastructure bill by taxing crypto trades over $10,000.

Key Takeaways

  • An amendment to a controversial crypto tax provision that imposes financial reporting requirements on a wide swath of crypto stakeholders failed to receive unanimous consent on Monday.
  • The amendment would have modified the bill's definition of a broker to exempt cryptocurrency validators, miners, and protocol developers from collecting information about parties they interact with.
  • The Electronic Frontier Foundation says that the provisions impinge on privacy rights of individuals and create a surveillance state.
  • The infrastructure bill's crypto tax provision will now be discussed in the House of Representatives.

An amendment to the provision, backed by a bipartisan group of six senators, failed to receive unanimous consent after Senator Richard Shelby (R- Ala.) insisted on a military spending rider of $50 billion to it. The move was opposed by Senator Bernie Sanders (D – VT).

The crypto community still has a fighting chance of changing the provision when the bill is discussed in the House of Representatives. "Next stop is the House where we can try to get a whole new amendment from scratch that can address all our concerns," tweeted Jerry Brito, executive director at Coin Center, a nonprofit that advocates for cryptocurrencies.

A Problematic Definition

The key point of debate in the bill is its definition of a broker for cryptocurrency transactions. The document's initial definition of the term required multiple entities—cryptocurrency validators, miners, and software developers—to maintain government-mandated records of their crypto dealings. Besides placing a financial burden on stakeholders, these requirements also undermine the philosophical underpinnings of an ecosystem built on a libertarian ethos of less government. The bill's definition underwent several revisions and amendments with iterations focused on exempting proof-of-work miners and proof-of-stake validators from the reporting obligation.

On Monday morning, Senators Cynthia Loomis (R-Wyo.) and Pat Toomey (R-Pa.) announced a compromise involving both sides of the aisle and the Treasury Department. "We're not proposing anything sweeping or anything radical—[the compromise] makes clear that a broker means only those persons that conduct transactions where consumers buy, sell, and trade digital assets," Senator Toomey said.

Their move received support from many, including from Fed Chair Janet Yellen, who stated that it would help make "meaningful progress on tax evasion in the cryptocurrency market."

As things stand now, however, the amended definition is not part of the bill. The scene of the battle has shifted to the House of Representatives, where Rep. Tom Emmer (R-MN) has already fired the first shot. He, along with Representatives Darren Soto (R-FL), Bill Foster (D-IL), and David Schweikert (R-AZ), sent a letter to congressional representatives raising concerns about the provision and urging them to amend the bill's definition of a broker.

Who Is a Broker?  

The current version of the infrastructure bill defines a broker as "anyone responsible for and regularly providing any service effectuating transfers of digital assets on behalf of another person." According to crypto experts, that definition is broad and implicates numerous stakeholders who are not directly involved in the actual digital asset transfer but facilitate the process by providing services related to it.

For example, cryptocurrency validators are not directly involved in transfers of digital assets but provide a service to validate transactions that occur in a cryptocurrency's blockchain using the proof-of-stake consensus mechanism. Similarly, cryptocurrency miners are responsible for producing digital coins and do not actually "effectuate" transfers. Software developers who work on a cryptocurrency's protocol or design its blockchain are also not directly involved with transfers.

The amendment proposed by Senator Loomey changed the definition of a broker is "any person who (for consideration) regularly effectuates transfers of digital assets on behalf of another person." Brito from Coin Center tweeted the new definition proposed by the amendment "tightens" the expanded definition of broker to exclude protocol developers, who might have been on the hook for reporting requirements.

A Community Up in Arms

The crypto tax provision has galvanized the crypto community and its supporters up in arms. Last week, the San Francisco-based Electronic Frontier Foundation highlighted privacy implications of the bill's requirements. "The mandate to collect names, addresses, and transactions of customers means almost every company even tangentially related to cryptocurrency may suddenly be forced to surveil their users," the organization stated.

The chief executive officer of Twitter, Inc. (TWTR) and Square, Inc. (SQ) Jack Dorsey, who is a supporter of cryptocurrencies, also tweeted to oppose the bill's provisions. "Forcing reporting rules on Americans who develop software and hardware, 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 the U.S.," he tweeted.

A consortium of companies and organizations, including Coinbase Global, Inc. (COIN) and Ribbit Capital, has called the bill's digital asset provisions "too broad and vague" and released a letter stating that cryptocurrencies should not be "subject to potentially devastating legislation" without public comment.