Foreign media: New US Bitcoin tax plan may stifle more environmentally friendly blockchain technology

According to The Verge, a bipartisan infrastructure bill being discussed in the U.S. Senate could reshape the cryptocurrency world as lawmakers debate new tax reporting requirements for various parts of blockchain systems. On Thursday, U.S. Treasury Secretary Janet Yellen directly lobbied lawmakers to retain stricter cryptocurrency tax provisions in the infrastructure bill, according to The Washington Post.

Foreign media believe this is a sign that the White House is committed to incorporating cryptocurrencies into the broader tax filing system, even if the details of the new requirements could undermine the delicate political balance of the infrastructure plan.

From the outset, the drafters of the bipartisan infrastructure framework hoped to offset a sharp increase in new spending with a new $28 billion cryptocurrency tax (collected over 10 years). In general, the tax proposal is not controversial — but the details of who will bear the burden of reporting transactions are difficult to agree on.

The initial bill text, released a few days ago, imposes a broad new requirement on cryptocurrency brokers, requiring them to report transactions as part of their tax returns, similar to existing requirements for traditional asset transactions. But the initial text defines "broker" vaguely, potentially extending to wallet developers or miners.

Senator Ron Wyden and others proposed an amendment. The amendment from Ron Wyden (D-OR), Cynthia Loomis (R-WY), and Pat Toomey (R-PA) would have explicitly exempted miners from any reporting requirements, but it has not yet passed. More recently, a group of lawmakers led by Senator Mark Warner proposed a slightly harsher compromise that has gained more support in Congress but has upset many cryptocurrency advocates. In particular, advocates worry that the uneven reporting requirements in Warner's proposed amendment could lead to a lasting split between different blockchain technologies.

Most cryptocurrencies still rely on "proof-of-work" blockchains like Bitcoin, which require energy-intensive "mining" to authenticate new entries on the blockchain. But a new blockchain model would allow miners to authenticate blocks by staking a certain amount of currency (hence the term "proof-of-stake"), allowing for faster and more complex transactions. Proof-of-stake blockchains are still less popular, but cryptocurrencies like Zcash are actively considering switching to the new model. Ethereum is launching its own blockchain, called Ethereum 2.0, or ETH2.

Warner's proposed amendment defines "brokers" to include proof-of-stake miners but not proof-of-work miners, citing the increased complexity and financial flexibility of proof-of-stake mining. But cryptocurrency groups worry that the additional regulatory burden will drive tokens away from proof-of-stake systems, stifling new innovations before they have a chance to take hold.

“The language in the new amendment codifies into law one of many competing technologies,” Coin Center’s Neeraj Agrawal tells The Verge. “It’s the government picking a winner in an otherwise competitive field. The worst part is that tech policy of this magnitude is buried as a last-minute tax provision in a massive, must-pass infrastructure bill. This is not the way policy is made.”

The split is particularly divisive given the intense energy demands of “proof-of-work” mining, a long-standing pain point for cryptocurrencies that many had hoped proof-of-stake systems would address. In a tweet Thursday evening, Senator Wyden criticized Warner’s proposed amendment from a climate policy perspective, calling it “a government-sanctioned safe harbor for the most climate-damaging form of crypto.”

Most bitcoin groups, including Coin Center, are now pushing for the Wyden Amendment as the least disruptive option, despite lobbying from the White House. “This will not happen if your elected representatives don’t hear you,” tweeted Coinbase CEO Brian Armstrong. “Contact your Senators and ask them to support this amendment.”