Part of a $28 billion fundraising proposal, the ‘unworkable’ plan would require permissionless DeFi exchanges and lending platforms to collect personal data.
The Biden Administration threw its support behind tougher tax reporting requirements on cryptocurrency earnings.
The move comes as competing groups of U.S. senators seek to amend taxation measures included in the Administration’s $1 trillion infrastructure bill, which as written adds an estimated $28 billion in revenue from the cryptocurrency industry.
At question in the competing proposals is an exemption that would effectively give developers and miners on proof-of-work blockchains a tax advantage over proof-of-stake validators. Much of the decentralized finance (DeFi) industry uses PoS.
Many in the cryptocurrency industry have called the bill’s requirements “unworkable,” as they would include “non-custodial” DeFi brokers like decentralized exchanges (DEX) and peer-to-peer lending markets.
As these are pseudonymous and permissionless, well known crypto attorney Jake Chervinsky tweeted
on July 30: “It's literally impossible for non-custodial actors like miners to get the information they need to do [IRS] Form 1099s. In practice, this could mean a de facto ban on mining in the USA.”
The cryptocurrency as a whole is moving away from the energy-intensive PoW consensus mechanism created for Bitcoin by Satoshi Nakamoto, citing its high cost, environmental impact, and the bad publicity resulting from the pollution created. Notably, the No. 2 blockchain Ethereum is moving (slowly) to a PoS-powered Ethereum 2.0 that would also dramatically improve the speed and scalability of the protocol.
A Question of Balance
The proposal favored by the White House comes from the crypto tax provision’s author, Sen. Rob Portman (R-Ohio), along with Sen. Mark Warner (D-Va) and Sen. Kyrsten Sinema (D-Ariz). It would alter the definition of crypto “brokers” subjected to new taxes to exclude proof-of-work validators and hardware and software wallet developers.
A competing proposal made on August 4 by Sen. Ron Wyden (D-Ore), Sen. Pat Toomey (R-Pa) and Sen. Cynthia Lummis (R-Wyo) would offer broader exclusions that would encompass proof-of-stake validators. Both would impose tax reporting requirements on crypto exchanges.
In supporting the Portman amendment, a Biden administration spokesperson said
it “strikes the right balance” and “will strengthen tax compliance in this emerging area of finance and ensure that high income taxpayers are contributing what they owe under the law.”
Sen. Toomey disputed that, saying on Twitter that the existing bill threatens to “stifle innovation,” Sen. Toomey tweeted
that by “clarifying the definition of broker, our amendment will ensure non-financial intermediaries like miners, network validators, and other service providers are not subject to the reporting requirements specified in the bipartisan infrastructure package.”
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