The US government plans to increase taxes on cryptocurrencies to raise about $28 billion for infrastructure agreements

In order to advance the $550 billion bipartisan infrastructure agreement, about $28 billion will be raised through taxing cryptocurrencies. The Senate has proposed a proposal to strengthen the U.S. Internal Revenue Service (IRS)'s supervision of cryptocurrency transactions, which has caused industry insiders and investors to question the feasibility of the plan.

The Senate unveiled a bipartisan infrastructure deal on Wednesday that includes significantly increased requirements for cryptocurrency brokers and investors to report transactions to the IRS, catching bitcoin exchanges, investors and their advisers off guard.

The reason for adding the regulation to the infrastructure agreement at the last minute is that the plan will raise large sums of money to help finance investments in transportation and utility upgrades in the United States. The proposal was put forward by the White House and Senator Rob Portman, the chief Republican negotiator. The proposal updates the rules requiring brokers to report cryptocurrency transactions and requires businesses that invest in cryptocurrencies to disclose transactions of more than $10,000. The White House has also proposed similar ideas in recent months.

“Rather than rushing through an untested provision with huge unintended consequences, we encourage Congress to work with industry to find rules that work for all stakeholders,” said Kristin Smith, head of the Blockchain Association, a Washington-based trade group.

The plan addresses a key challenge facing the federal government: the exploding cryptocurrency market, which has allowed holders to bypass the traditional banking system and remain largely anonymous and was valued at more than $2 trillion this year.

Chuck Rettig, commissioner of the Internal Revenue Service, said that tax evasion through virtual currencies is a key factor in the widening tax gap. The use of cryptocurrencies has also been linked to illegal activities, including drug smuggling and money laundering.

Cryptocurrencies are growing faster than the government can pass laws to regulate them, creating a rare shared concern among Republicans and Democrats, who typically differ sharply on tax issues.

Bipartisan agreement

The additional tax package was passed even after lawmakers from both parties decided to cut an earlier proposal in the infrastructure plan to expand the scope of IRS audits.

Meanwhile, cryptocurrency investors have been frustrated for years by the U.S. federal government’s lack of regulations on how to report their cryptocurrency holdings for taxes, and they have been unable to gain more clarity on how to comply with the rules.

"Everybody is talking about how to provide more reporting in an appropriate way, particularly if that will lead to better compliance," Portman told reporters Wednesday after the bill was announced.

However, the cryptocurrency industry has questioned whether the $28 billion revenue estimate from Congress’ official tax scorekeeper, the Joint Committee on Taxation, is accurate.

“There’s certainly a spectrum from non-reporting and willful tax evasion to true reporting lapses, and most people are closer to true misreporting,” said Guinevere Moore, a tax litigation attorney who represents clients investing in cryptocurrency.

Some crypto lobbyists said the draft text was unworkable and could be detrimental to the crypto industry’s development in the U.S. They said it would be difficult, if not impossible, to gather comprehensive information.

Compliance issues

The senators who authored the bill have yet to release a final draft of the bill.

There is a long tradition of industry complaints about more regulation and oversight, but Congress also has a history of rushing unfinished tax ideas into legislation when it needs the revenue from a new bill to offset other spending in a particular bill.

In 2015, Congress passed a new audit process for partnerships and LLCs because it would raise taxes to pay for a budget deal, though the lawmaker who proposed the idea said it still had technical problems.

“This is a very complex area where it’s easy to get it wrong, which is why we need a real committee process to consider these issues, not draft them in secret,” said Republican Senator Cynthia Lummis of Wyoming, who owns Bitcoin. “We’re working hard to make this bill better.”

Some companies in the crypto industry said it was unclear whether they would be able to comply with the proposal, which could push parts of the industry overseas if implemented.

Hardware wallets

Shehan Chandrasekera, head of tax strategy at CoinTracker, a company that helps people manage and calculate taxes on cryptocurrency transactions, said enforcing the new reporting requirements for cryptocurrencies will be difficult.

He said lawmakers are trying to apply what works for stocks and securities directly to cryptocurrencies. “I don’t think it will work because in crypto, there’s so much self-storage — a lot of people hold their crypto assets in hardware wallets — and that would never happen with stocks and securities.”

A hardware wallet is a physical device on which people store private keys that access digital assets.

Chandrasekera said implementing reporting on decentralized exchanges would also be difficult because many companies do not collect users’ Social Security numbers, names or addresses.