The infrastructure bill is expected to pass the House on 11/5, violating the 6050I tax law as a criminal offense. What should be done about DeFi?

The US infrastructure bill, which caused a stir in the crypto community in August this year, is once again causing concern as the deadline for the House vote approaches. The hidden tax provision in the crypto amendment, Section 6050I, has raised worries that non-compliance could be considered a criminal offense for DeFi users.

6050I Tax Law

According to its broad definition, "any person" who receives over $10,000 in digital assets is required to submit personal information to the government within 15 days, including the sender's name, address, social security number, etc. Failure to comply will result in mandatory fines and a maximum sentence of five years.

It is important to note that the primary purpose of 6050I is to investigate suspicious activities, with a focus not only on the recipient of the assets but also on the sender. Therefore, the failure to ascertain the source of cash or digital assets will be considered a violation of the law.

Abraham Sutherland, a lecturer at the University of Virginia Law School, pointed out in the article "DeFi and the Digital Asset Felony Hidden in the Infrastructure Bill" that while this does not prohibit DeFi, it is highly unfavorable to it, and compliance with the 6050I tax law is challenging given the operational nature of DeFi.

The original tax law was established in 1984, and the amendment will include all digital assets in the definition of "cash." This means that any entity, individual, distributed ledger, and any interactions within smart contracts will require reporting, with the exception of financial institutions such as banks.

Application in DeFi

Case: Liquidity Withdrawal

Andy previously mined in a liquidity pool, deposited funds, received corresponding LP tokens, and later redeemed assets from the liquidity pool using LP tokens.

Sutherland believes that post-amendment, it will be difficult to argue that Andy's "redemption" tokens are not the assets he "received." Additionally, if multiple withdrawals eventually reach the $10,000 threshold, reporting will be required.

AMM Transactions

Bob exchanges token A for B through an Automated Market Maker (AMM) platform. The B tokens he receives may also meet reporting requirements, and according to current regulations, when receiving assets from "multiple persons," personal information of all transaction participants must be listed on the report.

Sutherland points out that in the context of AMM mechanisms, the token sender is not another end-user; strictly speaking, the sender is the smart contract or the exchange's liquidity pool. Moreover, users depositing tokens into the liquidity pool do not intend to send tokens to Bob.

NFT Case

Charlie is an NFT collector, and David is an NFT art creator. One day, Charlie purchases an NFT artwork from David.

While this scenario is straightforward with no arbitrage involved and no suspicious behavior, both parties will receive digital assets in their accounts, potentially requiring reporting. Regulations do not exempt reporting when involving smart contracts, so when more complex smart contract interactions in DeFi are involved, the situation becomes more challenging to clarify.

Sutherland stated:

Old regulations do not apply well to new technologies, making it even more difficult to apply to digital assets and DeFi transactions. The revision of 6050I is an insult to a rule-of-law country, as it was quietly tucked into a 2,700-page bill. This amendment is worth paying attention to, and there is still time to stop it.

According to Reuters, the U.S. House of Representatives is expected to vote on social policy, climate change legislation, and bipartisan infrastructure bills on Friday.