The US unveiled a $1trn bipartisan infrastructure agreement this week, and cryptocurrency investors were able to win some last minute concessions.
Cryptocurrency exchanges were initially caught off guard last week by plans to partially fund US president Joe Biden’s bipartisan infrastructure agreement, which includes money for railways, roads and broadband access, by higher taxes on cryptocurrencies.
The changes were expected to generate around $28bn in additional tax revenue over the first ten years, says Bloomberg.
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As expected, the proposals stirred an uproar in the crypto community.
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“Instead of rushing through an untested provision with vast unintended consequences, we encourage Congress to work with industry to find language that works for all stakeholders,” said Kristin Smith, head of the Blockchain Association.
The bipartisan plan is the first part of Biden’s infrastructure agenda. It proposes $550m in new spending over five years above projected federal levels and is widely perceived as one of the most game-changing plans in the country’s history.
So what do the proposals now say on cryptocurrencies?
The latest legislative text released this week omitted some of the terminology that had caused concern among crypto market watchers.
Language that specifically mentioned decentralised exchanges or peer-to-peer marketplaces was omitted, to be replaced with a looser definition of brokers, meaning that decentralised peer-to-peer exchanges may not specifically be required to report transactions.
Part of the reason that Biden is targeting crypto is to raise money to fund his eye-wateringly expensive infrastructure agenda. Another reason, however, is a desire to tackle the underreporting of bitcoin gains. As it stands, crypto exchanges do not have to report gains and losses incurred by customers, but this could change even with the more generous text.
Nonetheless, the infrastructure agreement is still believed to have ramifications for the crypto market.
What Biden’s plans mean for cryptocurrencies
As Chris Etherington, private client tax partner at RSM UK, puts it, the main effect of the proposal is that it will force crypto exchanges to collate and share more data and “provide the IRS [Internal Revenue Service, the US tax authorities] with a much clearer picture of who should be paying tax on their crypto investments and the amounts due”.
This means investors who use centralised exchanges such as Kraken and Coinbase should expect the IRS to gain a much clearer picture into the exact amounts they earn from trading crypto, analysts tell MarketWatch, and should also expect to pay higher taxes.
The higher reporting requirements being proposed by the US could trigger tax authorities in other countries including the UK to follow suit, resulting in cryptocurrencies being treated by tax authorities in a similar way to the US Foreign Account Tax Compliance (FATCA), which requires non-US financial institutions to report to the US Treasury department details of and assets held by their customers with connections to the US, and the OECD’s Common Reporting Standards (CRS), which aims to prevent tax evasion by exchanging financial information between various countries’ tax authorities.
“The US is again using its size and influence to bring in these rules, and it will be interesting if other governments now follow, like they did with FATCA [ and CRS],” says Alex Straight, partner at law firm Blick tells Rothenberg.
“These rules could set a precedent for other tax authorities like HM Revenue & Customs to make requests for similar information to be shared with them,” Etherington says.
But it’s important that the tax regulation doesn’t act as a deterrent to investors. Such a scenario could mean tax authorities will eventually “shoot themselves in the foot” and get less tax revenues,” he adds.
So is this a good thing or a bad thing for crypto?
The concessions in the newer text for the crypto market may be branded as a win for the industry, but still many hurdles exist.
US senators will start debating the text this week, so there will no doubt be further changes to the text, both good and bad.
The increased reporting requirements may result in higher taxes being paid on cryptocurrency gains and could eradicate a cloud of uncertainty and underreporting in the market.
But it is worth noting that even with increased transparency, cryptocurrencies are still very much prone to regulatory upset. In May, China banned cryptocurrency mining in the country and prohibited Chinese financial institutions from participating in the sector.
Yesterday, Gary Gensler, chair of the Securities Exchange Commission, the U financial regulator, branded cryptocurrencies as the “Wild West” and called for more reform.
So keep an eye on how the final infrastructure deal pans out when it becomes law, but also on the many other headwinds looming over the crypto market.
