REGULATION

New Regulatory Concerns in the U.S.: Proposal to Increase Cryptocurrency Taxation, All Non-Custodial Wallet Providers, Miners, and Other Operators to be Fully Regulated

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New Regulatory Concerns in the U.S.: Proposal to Increase Cryptocurrency Taxation, All Non-Custodial Wallet Providers, Miners, and Other Operators to be Fully Regulated

The world's largest exchange, Binance, has launched a "tax reporting API tool" to comply with regulatory requirements in various countries, perhaps signaling the arrival of a compliant era in the cryptocurrency industry. Recently, the United States has introduced new regulatory trends with the $1.2 trillion Infrastructure Bill, bringing new concerns for "crypto taxation": a broader range of entities under regulation, extensive KYC requirements, and non-custodial entities and miners are no exception. Compound's legal counsel, Jake Chervinsky, has provided a detailed explanation of this matter.

New Proposed Tax Legislation May Include Crypto Industry: Encompassing Non-Custodial Actors and Miners

Compound legal counsel Jake Chervinsky stated that the latest tax legislation in the U.S. has broadened the definition of "broker," which now almost includes all participants in the cryptocurrency industry, including non-custodial wallet operators such as miners, requiring everyone to conduct KYC on users.

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Previous draft, revised on 8/2

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Revised version on 8/2, removing the term "non-custodial"

"This is not a joke," he remarked.

This legislation expands the definition of "broker," which will consider, depending on the circumstances, anyone responsible for facilitating and effectuating digital asset transactions on a regular basis. The earlier draft stated that "even non-custodial actors are included," which evidently encompasses decentralized exchanges (DEX) and peer-to-peer markets.

Jake mentioned that this definition is very broad and, in plain terms, it could encompass all roles in the U.S. crypto industry. This includes miners of both Proof of Work (PoW) and Proof of Stake (PoS) protocols, as they both provide services to effectuate digital asset transactions.

Moreover, it also includes a wide range of participants in the DeFi market, such as liquidity providers in DEX, liquidators, and governance protocol participants. The "depending on the circumstances" aspect in the definition could also encompass "non-economic" actors, such as node operators and wallet developers, making the scope quite extensive.

More Entities Required to Comply with KYC Requirements

This tax law requires brokers to comply with the reporting requirements of the U.S. Internal Revenue Service (IRS). Most importantly, they must request users to fill out 1099 Forms and report to the IRS synchronously. User information including names, addresses, phone numbers, etc., are essential for the forms.

This is equivalent to brokers having to conduct KYC on users to comply with the tax authority's requirements. Jake believes that this mirrors former Treasury Secretary Mnuchin's proposal during the Trump administration to apply travel rules to the cryptocurrency industry, providing authorized supervision, which is detrimental to the crypto industry.

This is because everyone knows that cryptocurrency users are anonymous and do not require approval to visit. In other words, for non-custodial actors like miners, providing 1099 Forms is simply impossible.

Jake believes this is tantamount to a de facto ban on the U.S. mining industry.

Is There a Connection Between Infrastructure Bills and Crypto Taxation?

Jake stated that as crazy as it sounds, this could actually happen. Most cryptocurrency legislation has been left unresolved, making it easy to overlook. However, this time is different. This regulation is part of a bipartisan infrastructure bill that is progressing rapidly through Congress and is likely to be passed.

Jake mentioned that people might wonder how cryptocurrency is related to infrastructure. He believes that the infrastructure bill includes user fee regulations to balance new expenditures with revenue, thereby achieving revenue neutrality. The redefinition of "broker" in this bill is a type of user fee regulation.

He suggested that there are three main ways to generate revenue in this bill: increase taxes, establish new taxes, or improve tax regulations.

He stated that what we are seeing clearly falls into the third category: taxing people for what they already own. Congress perceives cryptocurrency as a complete tax evasion tool, which is not the case in reality.

Jake mentioned that according to calculations, the infrastructure bill will cost over a trillion dollars, and the redefinition of brokers by the U.S. Congress could generate potential revenue of 28 billion dollars. Although he is unsure of how this figure was calculated, there is little that can be done against such significant legislation.

Five Reasons to Oppose This Bill

This is a serious erroneous law that would do more harm than good to the U.S. if implemented.

Here are five reasons:

  • Firstly, adapting to such regulation is fundamentally impossible and illogical, unless its purpose is to destroy the industry.
  • Secondly, this is a major failure in foreign policy. After China's mining ban, many hoped the U.S. would take over that market share. The U.S. cannot make the same mistake as China.
  • Thirdly, it will not succeed. To increase tax revenue, the U.S. may force more cryptocurrency entities to close or move overseas. The tax authority will not gain more cryptocurrency tax revenue; instead, more users will turn to non-compliant platforms.
  • Fourthly, it is taking shortcuts. FinCEN has done a lot for cryptocurrency anti-money laundering regulations, and tax laws should not shortcut to obtain KYC.
  • Fifthly, it burdens civil liberties. Jake believes that further encroaching on privacy rights is unnecessary.

Jake suggested that there is no need to panic about this bill at the moment, as it will not be finalized and take effect until 2023 at the earliest. He advised U.S. citizens to voice their opposition to their representatives. Cryptocurrency businesses can also join relevant organizations to prevent unfavorable legislation. He hopes the industry can unite as it did against FinCEN's proposed travel rule and bring this matter to a satisfactory conclusion.