In November 2021, President Joe Biden signed into law a bill containing provisions that restructure parts of the tax code for brokerage firms. If past indicators continue, the United States government would stand to yield $2.8 billion a year from taxed cryptocurrency transactions.
In an industry circulating over a trillion dollars at any given time, the U.S.’s taxes represent a proportionally very small amount of money. In writing this new infrastructure bill, lawmakers have missed the mark.
The crypto tax elements of the law are vague and ambiguous, but tend to be very narrow in focus, leaving out key elements of crypto trading. The infrastructure bill requires brokerage firms to keep track of certain transactions, and to pay taxes on certain profits. But what classifies as a “brokerage” is uncertain. Cryptocurrency traders, for example, can buy and sell their cryptos through the utilization of smart contracts, which do not require a broker. Moreover, cryptocurrency miners on their face would appear to share many of the same functions as a brokerage firm, but do not receive this classification under the new bill.
Essentially, this new bill applies blanket finance provisions to a cryptocurrency industry that is unlike anything lawmakers have seen before. Crypto law needs to be specially crafted to meet the demands of the industry.
Often, cryptocurrency transactions can be relatively simple to tax, or more complicated. For example, if a crypto trader exchanges a U.S. Dollar for Bitcoin, the transaction is simple and straightforward to tax. On the other hand, if a crypto user transfers their Bitcoin into a smart contract to hold an NFT, things get complicated. The current drafting of the Infrastructure Bill would require individuals dealing in complex cryptocurrency transactions to pay taxes as if they were a corporation, severely and unnecessarily complicating things. The minimum bracket to pay taxes as a brokerage is $10,000, like other financial regulations, but that threshold is low to deal with such complicated tax issues.
Complicating cryptocurrency tax transactions represents an issue for the IRS. The IRS will have to tie users to their transactions, something notoriously difficult for individuals trading outside of mainstream platforms.
Going forward, U.S. lawmakers should tread carefully before hastily implementing laws that could unnecessarily stifle a growing portion of the economy. The current drafting of the infrastructure bill risks hurting trading platforms and keeping the average American from trading cryptocurrency all together.
Worth mentioning, tax laws in the past have generally been problematic at the time of their inception, gaining clarity over time. As lawmakers gain a better understanding of digital currencies like Bitcoin, tax laws will inevitably become clearer. As cryptocurrency continues to grow in popularity, lawmakers will be forced to adopt more creative methods to regulate the industry.
For more information regarding cryptocurrency law and crimes related to digital assets, contact Miami criminal defense attorney Ralph Behr.