Nerves are on edge in the digital currency space since US President Joe Biden’s infrastructure bill proposed new reporting requirements and taxes on ‘brokers’ within the ‘industry. Biden’s bill left the determination of who would be considered brokers to the Treasury, which reassured a group of senators representing industry interests that the Internal Revenue Service (IRS) will not consider minors, stakers or coders as brokers.
What did the Treasury say and to whom?
According to The Block, the Treasury wrote a letter to six “concerned” senators on February 11: Cynthia Lummis (R-WY), Rob Portman (R-OH), Mark R. Warner (D-VA), Kyrsten Sinema (D -AZ), Mike Crapo (R-Idaho) and Pat Toomey (R-Pa.).
“Existing regulations impose reporting obligations on broker-dealers only on market participants engaged in business activities that give them access to information about sales of securities by taxpayers,” the letter states.
Naturally, coders, stakers and miners would not have access to this information, so they are not covered by the regulations. This will come as a relief to many. However, there was an uproar when one of the draft versions of the infrastructure bill was proposed in August 2021.
At the time, the six lawmakers profiled above argued that it was technologically impossible for miners, stakers and coders to maintain information about the people for whom they are validating transactions. They also raised privacy concerns. After some wrangling, the bill became law in November 2021.
While the Treasury’s recent letter is reassuring, it will likely take the release of formal black-and-white guidance before the jitters finally set in.
So, to whom do the reporting obligations apply?
The reporting obligations will apply to brokers who are defined by law as:
“Any person who (for compensation) is engaged to provide a service that performs transfers of digital assets on behalf of another person.”
Senator Toomey called the language “very flawed” and argued that it should be reviewed. Indeed, it is extremely broad language, and it is easy to see why it initially caused confusion and panic.
Although it seems like miners, stakers, and coders are off the hook, the regulations almost certainly cover digital asset exchanges and platforms of all kinds. This will require them to collect and report information on digital currency transactions and exchanges. The rules are expected to come into effect from the 2023 tax year.
The walls are closing in on criminals and tax evaders
Clearly, these new rules will be a major concern for those who use digital currencies to avoid paying taxes and engaging in illegal activities. For these people, the walls slowly but surely closed. Soon, the narrative that digital currencies like Bitcoin are beyond the control of the law will prove false.
For example, consider someone with significant value in digital currencies but never report it to the IRS. Soon, as the non-hosted wallet rule comes into effect alongside these reporting obligations, they may find themselves unable to trade or cash out their coins or spend them in significant amounts anywhere. If reporting obligations fall on wallet providers, they may find themselves unable to even move coins without linking their identity to their wallets. You can imagine where that might lead.
Other regulations that will have a big impact are the AML/KYC laws. We will likely see identity tied to wallets, or at least wallets with large balances. Although these identities are not publicly visible, they will be reported to the tax authorities of the relevant jurisdictions. When it comes to AML laws, we’ve already started to see issues with so-called “tainted parts.” The tweet below shows that some lending platforms are already refusing to accept coins they deem to have been mixed or used for potentially criminal purposes.
Another happy BlockFi customer. pic.twitter.com/ljwodJR4r0
– Bitfinex’ed 🔥 (@Bitfinexed) February 5, 2022
Although it is common sense that miners, stakers and coders are not affected by the new regulations of the Infrastructure Bill, these regulations and others like them will significantly change the industry. They will drive out elements of the underworld and those of an anti-law anarchist bent. Finally, with their demise, enterprise uses and actual utility can be built and encouraged within the ecosystem.
Watch: US Congressman Patrick McHenry on Blockchain Policy Issues with Bitcoin Association’s Jimmy Nguyen
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