Regulatory Developments

FDT Explorer: Digital Assets and Section 80603 Of The Infrastructure, Investment and Jobs Act

The US Senate passed a much-debated infrastructure bill on August 10.

Gunnar Jaerv   Gunnar Jaerv · Published on 17 August 2021

The $1 trillion Infrastructure, Investment and Jobs Act includes $550 billion of new spending, as well as $450 billion in pre-approved spending — much of which is allocation for key planks in the green platform of recently-elected President Joe Biden, as well as money to rebuild and fix America’s national infrastructure.

The Democratic administration will now move on a follow-up $3.5 trillion package, seeking to maintain a slim majority in the Senate. However, House Speaker Nancy Pelosi has said the House will not vote on the infrastructure bill unless and until the bigger, more ambitious package also passes the Senate, meaning the bill might have passed, but won’t become law for a while.

However, this isn’t what concerns us.

Section 80603 and the definition of “broker”

Inside the infrastructure bill is Section 80603, which imposes “strict tax regulations on cryptocurrency brokers”, in the words of the New York Times. This turns out depending what you mean by “broker”, which forms the substance of a major Senatorial dispute — and is itself addressed more widely in Section 6045. This section deals with the definition of a broker for tax reporting purposes.

Prior to IIJA, this referred only to brokers of sales of corporate stock, interests in trusts and partnerships, debt obligations, certain commodities and various associated derivatives; under IIJA as it currently stands, “broker” will mean “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”.

This wider definition of the term is obviously something of a wide net, and one that could be dangerously indiscriminate. The phrasing would include custodians, trustees, exchanges, miners, node operators, validators, and others.

Amendments and exemptions defeated in the Senate

After the manner of American legislation, in which any Senator can include any amendment, riders were added.

Senator Pat Toomey of Pennsylvania presented the amendment, which was co-sponsored by Senators Mark Warner of Virginia, Kyrsten Sinema of Arizona, Rob Portman of Ohio, and Cynthia Lummis of Wyoming.

Senator Richard Shelby of Alabama added his support, but also $50 million in defense spending. Senator Bernie Sanders of Vermont objected to Shelby’s defense spending provision; Shelby refused to countenance the digital assets alteration without the military spending.

“Because there’s a difference of opinion on whether or not the senator from Alabama should get a vote on his amendment, because that is not agreed to, the body is refusing to take up an amendment that has broad bipartisan support”, said Senator Toomey on the Senate floor. “In what universe does this make any sense?”

So much for the Senators. What were they seeking to amend?

Reporting obligations and revenue sources

The substance of the argument is the legal definition of the term “broker”, as offered by the bill.

This matters, because it determines who must report gains in digital assets to the Internal Revenue Service, and what threshold triggers the reporting requirement. It establishes a new tax liability for some people who make some profit from digital assets, with the debate centering on which people and how much profit.

The tax proceeds are expected to fund up to $28 billion in infrastructure investment, so the discussion is far from academic from legislators’ perspective as well as its obvious effects on our industry. In fact, the initial target of revenue efforts was not digital assets but the “tax gap” — the difference between taxes owed under the current regime, and taxes collected.

This gap was forecast to amount to about $100 billion over ten years, mostly in the form of increased IRS enforcement action, but objections were raised over the increased scope of the IRs’ activities and an alternative was sought.

The final discussion was around a compromise text, introduced by Secretary of the Treasury Janet Yellen, which excluded software developers and blockchain validators from the new rules. Under the Yellen text, the law would have imposed its new taxation burden on investors but not on those who write code or operate digital assets businesses per se.

But that isn’t the bill we got. Instead, the original version of the text has passed the Senate. This version requires miners and block validators to pass on tax information to the IRS. Currently, people who act as brokers in the conventional sense are obligated to report to the IRS. Reporting compliance isn’t total, but it isn’t total in any industry.

Legally requiring the technically impossible

The new bill would oblige everyone who validates blocks, mines or operates a node to comply with IRS reporting rules. However the new regulation ignores the crucial fact that miners and validators don’t have access to this information on users, because blockchains are anonymous by design. Consequently, this bill as it stands looks as if it would effectively outlaw blockchain mining in the USA, and affect validation activities for PoS blockchains as well.

However, the language in the bill is not fully precise, and there are still things lawmakers can do to clarify the intent of the law. In the USA, this is a crucial consideration, because the law will be interpreted by judges based on these indications as well as the written text.

“All that means is we’re gonna have to fight this another day because it’s important that the Congress define these terms and create a level playing field”, Senator Lummis told an interviewer. “Going forward this fall we’re gonna have to be much more proactive about defining terms in this space so people can still innovate”.

The future of the Bill and the House Blockchain Caucus

The bill is likely to face resistance in the House. Congressman Tom Emmer was among those who signed an open letter to the Congress, stating that “when the Infrastructure Investment and Jobs Act comes to the house, we must prioritize amending this language to clearly exempt noncustodial blockchain intermediaries and ensure that civil liberties are protected”.

Jointly signed by the bipartisan chairs of the Blockchain Caucus, including Congressmen Darren Soto, David Schweikert, and Bill Foster, the letter pointed out that the bill as currently written will be difficult to apply to “miners, stakes, lightning nodes, etc.”, since these “are not middlemen between parties to exchange, do not have customers, and have no way to collect this information”.

“As a result”, the letter continues, “the requirements of Section 80603, as currently drafted, could drive blockchain software development, cryptocurrency mining, and similar opportunities, out of the United States”.

Reporting digital assets income to the IRS

Currently the reporting requirements for digital assets earnings are slightly difficult to comply with, partly because they’re hard to find on US tax forms. Until 2019, the IRS had no ready-made way to report digital assets earnings at all. Then a question asking about the subject was added to the Schedule 1 tax reporting form, but that’s not a mainstream tax reporting form. It’s there to report income from gambling, alimony, and capital gains; most people never see it.

In 2020 the IRS moved the question to the 1040 form that most people use to report their taxes. It’s now prominently displayed as one of the first questions after names and addresses.

Tax rules around digital assets are also both unclear, and constantly changing, meaning digital assets companies and investors are equally unclear. Many have over-reported their income from digital assets, because of difficulty calculating profits from an asset whose price changes rapidly, while others have not reported at all.

The IRS currently treats BTC and other digital assets simply as property, taxing owners based on the same rules they would use for real estate. The difference is that even in very hot markets, real estate prices don’t change as fast as BTC does. (House prices don’t rise as fast as BTC has risen over the last decade either.)

What does this mean for the industry?

For the digital asset space more widely, this potentially means something much more serious. Currently, Bitcoin mining has been banned in China, is likely to be banned in India, and faces repression in other jurisdictions. The digital assets industry may be running out of places to mine, and losing contact with Silicon Valley and the American banking system would also be major obstacles.

However, the bill is not yet law and is likely never to be in its current form. It was not amended by the Senate largely due to Senatorial rules, and will next be debated in the much larger House of Representatives, where sentiment is much more on the side of digital assets investors and professionals.

We can expect that, whatever the sentiment of the Senate, the American legislature will eventually pass a bill into law that lets digital assets businesses continue to operate on American soil. Rather than being a deliberate attempt to expel or suppress such businesses, this appears to be a consequence of some Senators not fully understanding the technical basis of digital assets, and of the fractious politics of Capitol Hill. The most likely outcome is a version of the bill not too dissimilar from the defeated amendment, with America’s digital assets investors and businesses more regulated, but secure.


This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.