Quiz night question: which is harder to fathom – the mechanisms of cryptocurrency or the machinations of Congress?
I don’t know how to present today’s story. Speak, memory… no, nothing arises from my father’s grim humor, his instructive tales of tomato planting, cheats to select ripe peaches, or the time his buddy fell into the gears at the plant, that might provide insight into this crypto-political mess. Dad must be spinning in his Heavenly lounger.
Let’s start at the beginning – as I can fathom it. Congress, Treasury, and the IRS agreed that cryptocurrency brokers should report their activities so taxes can be paid in proportion. The key point here is properly defining ‘broker’, but they dropped the ball and the proposed legislation was awkwardly written.
The resulting crypto-broker bill was birthed in the Senate, in the manger of the infrastructure bill – rather like planting a daisy in the Brazilian rainforest. The infra bill tops one trillion dollars, and it’s merely a warmup for a titanic big brother: next year’s model is worth $3.5 trillion. I’m not sure what to say about it, but I’ll think of something when we are forced to consider it.
How such a maladroit bill could reach Congressional desks is confounding. Yet it occurred, and the cryptocurrency industry responded with mortal fear. Could this haphazard law gain passage by inertia, entwined as it is with that inscrutable infra-gargantuan statute of spending? Passage might destroy the domestic cryptocurrency industry, forcing operations overseas, into markets ruled by more cogent laws. Lose one for our economy, they say.
Here’s the beef: as worded, the crypto bill would impose tax reporting requirements on “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of other person.”
As thus written, miners and developers would be considered brokers, and forced to report all manner of information they cannot provide – details of transactions and holdings of which they know nothing. Failure to comply would mean a call from the IRS, followed by unanswerable questions that could finish one’s business.
Let’s clarify our terms. Developers are high-level technicians. They design blockchain protocols, network architecture for transactions; they build front-end designs to serve customers, construct back-office systems, create and monitor smart contracts. They are bold frontier specialists, best defined as enablers of the burgeoning new cryptocurrency business.
Miners engage in the staggeringly arduous process of creating new cryptocurrency tokens via solving computational puzzles or other dizzyingly opaque or capricious means. They sure know a lot, but not much about anything taxable.
How these parties, known as transaction validators, got drawn into this legislative mess is any befuddled Congressional staffer’s best guess.
What happened next?
The industry howled; a band of Senate legislators listened and worked up a bipartisan compromise bill, worded to exempt validators from the category of brokers. The Treasury Department signaled its agreement. Aisle-crossing support was secured for a calm vote; President Biden signaled consent. The ship of state was sailing smoothly and grandly, for once.
Enter Senatorial procedure. A unanimous vote was needed to pass the compromise. Senator Richard Shelby, R-AL, insisted on adding $50 billion in military infrastructure spending to the mega host bill. You’d think Treasury could find that amount by sweeping under desks and digging behind filing cabinets, yet the senator’s objections led to chaos.
“It is shameful that this massive infrastructure legislation contains not one dime for our military’s vast infrastructure,” thundered Shelby, on his webpage. “Senate Democrats blocked every attempt to fix this glaring omission.” Ah, it’s their fault. “There is a clear and dangerous pattern here.” I can’t help but agree – yet in this scene, nothing is new; it’s how the Hill operates.
Rational senatorial compromise, rest in peace. Matters now pass to the House of Representatives, where a similar compromise rests anxiously on the table, although now certain Democrats are balking, horse trading, and haggling. It’s next year’s $3.5 trillion infrastructure bill that concerns them, and I’ll spare you the grim details, as they shift and reshape like sandcastles under the tide.
There’s still time for reason to prevail, as voting on the bill won’t take place until next week. Say your prayers, and if you aren’t the knee-bending type, there’s just time to learn.
Can we end on a high note? Bloomberg reports that on August 13 the Treasury Department said that if the bill passed in its original wording, it wouldn’t pursue those transaction validators so ineptly defined as brokers.
Treasury suggested a legal cheat that would limit the bill’s reach to parties defined as brokers under the tax code. Well, that just might work.
This news spurred a sprightly rally in Bitcoin’s value, so I am loath to disclose the article’s source: an ‘unnamed official’. Still, I eagerly await a definitive, happy word from Treasury.
The crypto industry sees good signs in this soupy mess. Congress thinks cryptocurrencies and their Gordian markets are worthy of taxation and legislative pentathlons; they clearly are here to stay. I agree: recent events are a confidence vote for this spectacularly valuable, headily volatile new asset. Yet I wonder if anyone looking at this Congressional endorsement is drawing a rather more jaundiced conclusion.