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The battle over cryptocurrencies is shifting to the House after the Senate failed to pass a compromise on tax-reporting requirements as part of the $1 trillion infrastructure bill.
The Senate passed the infrastructure bill Tuesday morning. It will now moves to the House, where Speaker Nancy Pelosi has said she would bring it up after the Senate passes Democrats’ $3.5 trillion budget plan.
The original language in the infrastructure bill clarifies the definition of “broker” for tax-reporting purposes. It was fiercely opposed by the industry since it could be interpreted broadly to include crypto miners and other companies involved in operating blockchain networks, along with software and hardware developers.
Republican and Democratic Senate negotiators struck a compromise on Monday to exclude miners and other transaction “validators” from tax-reporting requirements, and the White House supported their amendment.
Yet the measure failed to clear the Senate after Sens. Richard Shelby (R., Ala.) and Bernie Sanders (Ind., Vt.) dueled over allowing amendments on the floor, essentially killing the crypto deal.
With the bill now heading to the House, it’s unclear what happens next. House members could try to revive and pass the Senate’s compromise amendment, but that could be procedurally difficult since it could open the bill to other amendments—something the White House and Democrats are likely to oppose.
The crypto industry has argued that miners would face unworkable reporting requirements if they are deemed to be brokers, such as requiring them to collect tax information on transactions and issue 1099 forms. The problem, industry backers say, is that blockchain operators have no way of knowing a transaction’s cost basis, let alone tracking down customers or issuing 1099 forms.
“As written, the infrastructure bill contains harmful IRS reporting requirements that many in the crypto ecosystem lack the capabilities to comply with,” the Blockchain Association, a crypto lobbying group, said in a statement. “As a result, many crypto players will be forced to move overseas, leaving future jobs and economic growth on the table.
Miners validate transactions that have taken place between two parties—rather than effectuating, or brokering, a trade. The miners then add blocks of transactions to a decentralized network, known as a blockchain. They don’t know the identity of traders or their cost basis—making it unworkable to issue 1099 forms.
Some industry backers aren’t particularly worried that the bill’s language will sweep up the miners. For one, it could be modified when the bill heads back to the Senate for reconciliation in the Finance Committee, says Michelle Bond, CEO of the Association for Digital Asset Markets, a crypto industry advocacy group.
Moreover, it will then go to the Treasury Department and Internal Revenue Service in a rule-making process that will include public commentary. And it will be another two years before rules are implemented.
“All this has to go to rule making, and there’s another bite of the apple at that stage,” says Bond. “People are sounding alarms, but this isn’t over.”
Regulators could also face pressure to exclude miners from reporting requirements for economic reasons.
Mining companies have been moving to states like Wyoming and Texas, as mining shifts from China. The industry is trying to clean up its energy-consumption profile from cheap coal-fired electricity to the use of renewables like wind and solar, and mining companies are setting up in states where they can operate with a lower carbon footprint.
“Worst-case scenario, it passes and you have to abide by the new policies,” says Steven McClurg, chief investment officer of Valkyrie, a crypto asset-management firm. But he expects the regulators to exclude miners from being defined as brokers. “In the long run, it’s not going to hurt the industry so much,” he says.
The markets seem to agree with that assessment.
Bitcoin was down slightly in trading on Tuesday, off 1.6%, at around $45,170, and maintaining 18% gains of the past week. Ethereum was off 1.5%, at $3,120, up 25% in the past week.
Crypto-mining stocks were a bit weaker, following gains on Monday.
Marathon Digital Holdings
(ticker: MARA), a crypto-mining company, was down 2.7%, while
Riot Blockchain
(RIOT), another miner, was down 1%.
Coinbase Global
(COIN), the largest publicly traded crypto exchange, was down 3.8%.
Write to Daren Fonda at daren.fonda@barrons.com
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