Lawmakers predict that they can raise nearly $30 billion in revenue through collecting more taxes on cryptocurrency as part of a new bipartisan deal on infrastructure, but that estimate is getting pushback from analysts who say the plan is not as easily administered as it is drawn up on paper.
A bipartisan group of senators agreed to a $1.2 trillion infrastructure package on Wednesday after weeks of negotiations. A major sticking point among Republicans was that they wanted it to be paid for, so several financing streams were envisioned as part of its implementation, including on digital assets.
In addition to more than $200 billion planned to be repurposed from certain unused COVID-19 relief funds and $53 billion from states returning unused enhanced unemployment benefits, the bill envisions $28 billion being collected by applying new information reporting requirements on cryptocurrency trading.
A draft of the bill dictates that any broker who transfers any amount of digital assets would have to file a return under a modified information reporting regime, according to CoinDesk. The provision also updates the definition of a broker and clarifies that broker-to-broker reporting on transfers of covered securities includes digital assets under law.
The bill would also mandate businesses to report cryptocurrency transactions of more than $10,000.
Peter St. Onge, a research fellow for economic policy at the Heritage Foundation, expressed skepticism over not only the plan but also the projected revenue. He told the Washington Examiner on Thursday that the rule change would be “insane” and that the mandate would be incredibly cumbersome to individuals who use cryptos as currency.
“It’s not just a question of avoiding regulations. It’s that this particular regulation is something that customers do not want — customers do not want intermediaries to be holding their information, and that specifically is what this would require,” he said.
Citing Tax Foundation data from 2018, St. Onge said that the entire capital gains tax at the federal level raises about $170 billion. He said the notion that Congress hopes to collect an amount from cryptocurrency tax revenue equivalent to one-sixth of that is divorced from reality, given there is much less crypto capital.
“I would be shocked if they managed to raise more than $1 billion on this,” he said. “And meanwhile, it’s hugely disruptive for the industry, specifically because the way the industry today is designed is that firms try not to hold on to your information.”
As it currently stands, crypto investors must report their gains to the IRS and also report when they are paid using the digital assets.
St. Onge pointed out that the IRS has been getting more aggressive about collecting revenue from those who use cryptocurrency in the past few years. Last year, the IRS added a line about cryptocurrencies on Form 1040, which is used for personal federal income tax returns.
The agency also conducted a campaign to collect unpaid taxes in 2016 when it received approval to summon Coinbase and obtained information on about 13,000 users. The IRS then sent letters to them about their crypto taxes and, because of the crackdown, received more than 1,000 amended tax returns and $13 million in new revenue from those with more than $20,000 worth of transactions.
David Sacco, a practitioner in residence at the University of New Haven finance department, pointed out the difference between people storing cryptocurrency on exchanges such as Coinbase, which is a publicly traded company, versus private wallets, which he referred to as “vaults.”
Sacco predicted that, as cryptocurrency investment becomes more commonplace, more will gravitate toward exchanges, which are more similar to banks and brokerage firms, rather than wallets, and the funds of which are easier for the government to oversee and tax.
He told the Washington Examiner that one perk about trading and storing in exchanges compared to a vault is that one doesn’t have to worry about losing a password, or key, because funds can still be recovered. With private wallets, a lost key can mean losing all assets.
Sacco thinks that it may be “plausible” for the government to recoup near the projected amount of funds as people investing in exchanges proliferate but said whenever the government is talking about spending money and how they are going to fund that spending, it typically overestimates its revenue projections.
Although, St. Onge predicted that if the bill’s regulations become law, it could drive investors away from more regulated exchanges. He said it might accelerate people taking their assets out of exchanges and into private wallets.
Regardless of the infrastructure bill, both Republicans and Democrats have been pushing for more regulation. Sen. Cynthia Lummis, who voted to oppose taking up the infrastructure legislation, told the Washington Examiner on Thursday that a committee should be drafting up changes to how cryptocurrencies are taxed.
“This is a very complicated space, easy to get wrong, and this is why we need a real committee process to consider these issues, instead of secret drafting. We’re working on making it better,” the Wyoming Republican said.
President Joe Biden’s Treasury Department has also made moves to regulate cryptocurrencies more thoroughly. Treasury Secretary Janet Yellen held a meeting with federal regulators to discuss the need to come up with plans to regulate stablecoins, a type of cryptocurrency that have their value tied to another asset class, such as gold or fiat currency.