Infrastructure Bill Ramification for the Crypto IndustryNews Research 31 August 2021
A group of 10 senators, five Republicans and five Democrats, introduced the $1 trillion infrastructure bill, which includes roughly $550 billions above projected federal spending to be spent on roads, bridges, broadband access, water pipes, and other infrastructure projects.
Searching for new resources to fund the infrastructure package, they propose to require brokers of digital assets to report customer information and capital gains to the Internal Revenue Service. The Joint Committee on Taxation estimates the crypto reporting rules to generate roughly $28 billion in revenue over a decade.
Brokers, defined as anyone who is “responsible for and regularly providing any service effectuating transfers of digital assets on behalf of another person” are required to comply with IRS reporting requirements. This broad definition could potentially encompass miners, developers, stakers, and other entities to file tax reports that would include KYC (know-your-customer) details. Crypto advocates are concerned that those entities could not possibly comply to such rules, as most people who use their service are anonymous.
Senators Ron Wyden, Pat Toomey, Cynthia Lummis, Rob Portman, Mark Warner, and Krysten Sinema proposed a lastminute amendment to clarify the definition of brokers that needed unanimous consent for the bill to pass through. The compromise amendment failed to pass when Senator Richard Shelby voted “no” after his proposal to add $50 billion in military funding was blocked by Sen. Bernie Sanders.
Therefore, the infrastructure bill was passed through the Senate with the original language, with the broad definition of “broker” remaining.
Taxation system on cryptocurrency in the U.S. and Japan
There is still considerable confusion about taxation on Bitcoin even after more than a decade of its conception. There are significant differences in the taxation system in different parts of the world.
In the U.S., The Internal Revenue Service finally addressed this in 2014. Bitcoin is classified as an asset similar to property and is taxed as such. Every U.S. taxpayer is required to report Bitcoin transactions of all kinds; be it buying, selling, or investing. Simply purchasing cryptocurrency with U.S. dollars and keeping it within the exchange or transferring it to your own wallet is not a taxable event. However, crypto transactions become taxable as soon as it is used as a method of exchange. This includes selling crypto for U.S. Dollars, exchanging one cryptocurrency to another, or using cryptocurrencies to buy goods and services.
In Japan, cryptocurrencies were considered as “virtual currencies” but they were renamed to “crypto assets” due to the fact that most crypto assets are not used as currencies. This revision also made regulations on crypto exchanges stricter for better investor protection. Just like in the U.S., when cryptocurrencies remained as it is, no matter how much their value appreciates, no tax is accrued. It becomes taxable only when any gains have been realized by exchanging, selling, or using it. Any profits from crypto mining, trading, lending, and other activities is categorized as miscellaneous income and becomes part of taxable income in the tax year. It will then be taxed a certain percentage ranging from 5% to 45%, depending on the income tax brackets and its corresponding tax rates.
Tax implications on the behavior of crypto investors
In Japan, capital gains on crypto are subject to a tax rate of up to 45% whereas capital gains on stock are taxed at 20%. Since capital gains on crypto are very highly taxed, it discourages individuals and companies from properly reporting their crypto gains on their tax returns.
In the U.S., short term capital gains are taxed differently than long term capital gains. A short-term capital gain is obtained through the sale of an asset owned for one year or less, while long term gain results from assets held more than one year. Long term capital gains are taxed at a more favorable rate, which averages at 15% or lower. On the contrary, short-term gains do not benefit from any special rates and are taxed like ordinary income, which can go as high as 37% depending on the corresponding tax bracket. Because of this policy, investors are incentivized to hold their crypto assets for more than a year.
Fig 1. A graph showing the total amount of circulating supply held by long term & short-term holders. Supply held by LTH keeps increasing while supply held by STH shows no discernable pattern. Tax, among other elements, may be a contributing factor.
Currently, the transaction and tax implications associated with holding and using Bitcoin for purchases are much more complicated compared to other more traditional assets. As a result, many investors chose to stick to traditional asset classes.
The amendment has failed to pass, now what?
Even though the original bill passed through the Senate, industry advocates and lawmakers are still hoping for an amendment when the bill gets to the House of Representatives. If this also fails, the industry will attempt to persuade the IRS and Treasury Department to compose a clear definition and regulations when they implement the law. Many believe that cryptocurrency tax reporting is important, but it must be done correctly.
If the language of the bill stays as is, it would require taxation that is not feasible to comply with, which in turn discourage innovation of block chain and crypto in the U.S. It is also likely that smaller companies respond to this regulation by moving their operations overseas, which is harmful for both the crypto industry and the US government’s potential tax revenue. However, this effort by policy makers to impose a stricter taxation system on this $2 trillion industry indicates that the government is starting to accept cryptocurrencies as an established part of the financial system.
One thing we have to remember – the U.S. doesn’t dictate crypto. Crypto is not sovereign and not limited to just one country. It’s worldwide and it’s still early. The laws are not likely to be implemented until 2023; a lot can happen in that time, and there is still time to get this rectified.