How the new crypto tax rules miss the mark | David Z. Morris

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In a potentially extremely disruptive move, a last-minute provision of a major bipartisan infrastructure bill passing through the United States Congress would impose stricter reporting requirements on cryptocurrency transfers, which the bill says , would generate an additional $ 28 billion in tax revenue.

But the legislation, according to at least two crypto-regulation experts, is so flawed it could be unenforceable. Specifically, the rule as written seems to define any actor who participates in a cryptocurrency transfer as a broker. This could place transaction reporting requirements on a strange array of players, including miners and decentralized exchanges.

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Creators of software wallets might even be required to track and report user transactions, according to crypto lobbyist Jerry Brito of Coin Center and director of the Blockchain Association, Kristin Smith. Of course, software and hardware crypto wallets don’t track or report user transactions, making it impossible to comply with the law.

The disconnect highlights the fragile foundations of US attempts to tax or regulate crypto. There are at least two separate bills in the House of Representatives that attempt to establish basic definitions, jurisdictions and standards for the regulation of crypto. Putting them in place before trying to impose a poorly designed tax might have been a good idea.

The case of software wallets is illustrative. They are basically tools for interacting with a database, not unlike a web browser. They are not services, nor is your leather wallet a service for holding dollar bills. There is actually no service handling bitcoin or any other legitimate cryptocurrency, a fact that fundamentally clashes with the regulatory framework that lawmakers are trying to squeeze in.

These flaws are of particular concern as the measure was introduced as a revenue-generating element of the much larger bipartisan infrastructure bill, creating a rushed environment with little room for subtlety or revision. On Twitter, Brito called the bill a must-have and said staff at the Coin Center worked all day. [Wednesday] trying to correct the measure, and continued until Thursday. The good news is that the bill is still on the table, so there is at least the possibility that things will change.

In addition to their technical flaws, the new tax rules rely on near-universal surveillance and automated reporting, rather than a voluntary privacy reporting system, with investigation and enforcement for those who break the law. This potential law, just like the new EU money laundering rules introduced this month, would likely create huge honeypots of personal and financial data that would be targeted by hackers, including your data, which you whether or not you were looking to evade taxes.

The sins of this ill-conceived tax, however, should not be blamed on taxation as a whole: Strange as it may sound, the development of cryptocurrency has advanced tremendously thanks to investments funded by past tax revenues. SHA-256 cryptography was developed by the National Security Administration. The Internet itself was created largely by the Defense Advanced Research Projects Agency (DARPA) program of the Department of Defense. David Chaum, one of the top 10 digital money pioneers, received a doctorate from the University of California, Berkeley in the 1970s, when public funding kept tuition fees at around $ 800 per year. .

Most of the innovations that transform the world rely on a similar level of collective support, as basic or speculative research usually does not pay off fast enough for the private sector to invest in it. So there is nothing fundamentally wrong with crypto being supposed to give back to support the next generation. innovators. But the current rushed and technically flawed approach could significantly hamper the very innovation that took so many years and resources to bring to life in the first place.

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