Infrastructure bill has big changes for crypto

12 January, 2022

The $1 trillion infrastructure bill signed into law by US President Joe Biden contains provisions to tax crypto, yielding an estimated $2.8 billion per year. What does this mean for the future of cryptocurrencies, and will it encourage companies to get on board?

Crypto is on a tear. It’s estimated the global cryptocurrency market is worth $US2.3 trillion, but the recent $1 trillion infrastructure bill, signed into law in the US, is placing reporting requirements on exchanges to better understand and follow transactions in crypto markets sometimes perceived as lawless.

Governments around the globe, including the US and Australia, are exploring the regulation of crypto, which currently exists in a financing grey area.

“The infrastructure bill says digital assets are considered cash for reporting purposes, and a failure to comply carries hefty penalties.”

Brad Polizzano
Senior manager, commercial practice
Baker Tilly US

The Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act), is expected to bring in an extra $2.8 billion in tax revenue every year by requiring brokers to report crypto transactions to the IRS, according to Baker Tilly US senior manager, commercial practice, Brad Polizzano.

“It’s basically the equivalent of what we see as 1099-B in the United States,” says Polizzano. “It’s calculating the gains and losses by these cryptocurrency brokers.”

There’s also a second component of the bill which is less-well known. This provision is a cash reporting regulation, which has proven controversial in some quarters. Under the Internal Revenue Code, a transaction or series of transactions amounting to more than $10,000 during a trade must be reported on form 8300.

“The infrastructure bill says digital assets are considered cash for reporting purposes, and a failure to comply carries hefty penalties,” Polizzano noted.

At the same time, there are some aspects of the treatment of cryptocurrency which have not changed under the bill. It does not change the tax treatment of engaging in crypto transactions, for example. Virtual currency, the IRS term for digital representations of value, are still treated as property.

So why has the US government enacted these changes?

The main reason remains the wild-west nature of the crypto space, and the lack of regulation around emerging digital and alt-currencies. But governments are also frustrated by missing out on a considerable amount of revenue because of the lax reporting requirements and the fact many citizens and brokers who engage in crypto trading are believed to under-report their incomes.

“I don’t think the US government has figured out its position on what crypto is right now,” says Todd Olson, Baker Tilly US director of digital assets, financial services.

“A big part of this bill is the government wanting to monitor what’s going on in the crypto space, getting a handle on the size and scope of the transactions that are happening.”

Todd Olson
Director of digital assets, financial services
Baker Tilly US

“But talking of raising revenue, I think the US government is going to have a hard time guesstimating what that would be.

“A big part of this bill is the government wanting to monitor what’s going on in the crypto space, getting a handle on the size and scope of the transactions that are happening.”

One of the questions associated with the bill is its relationship to seizures of crypto used in Illegal activities.

The bill, designed to bring some transparency to transactions, will also shine a light on people who are under-declaring their crypto-related income – and might be doing so because it represents proceeds of crime.

The US body FinCEN estimates around ten per cent of all crypto activity is illicit, while other estimates place it at only one per cent, says James Creech, IRS practices and procedures, Baker Tilly US.

“It’s hard to even get a top-line figure on the amount of illegal activity,” he says.

“A lot of the people using crypto are speculating on it like gold appreciation. And then there’s the growing area of ransomware attacks.

“Depending on where you’re coming from, there’s a different perspective on the volume of trading and transactions.”

Essentially the US government has taken a very broad position that if someone has transacted in the crypto space, even if it’s a non-taxable event, it wants to know about it.

“A lot of the people using crypto are speculating on it like gold appreciation. And then there’s the growing area of ransomware attacks.”

James Creech
Baker Tilly US

Mr Creech says the government has moved fast on this issue because in April 2021, the IRS commissioner identified crypto as a large source of the tax-gap, and the way to combat this is through informational reporting.

“As soon as people know the government is getting information they have a tendency, at least historically, to be more honest and report more accurately,” he says.

“And so, the government is trying to reproduce some of those victories.”

The crackdown on reporting also brings crypto exchanges under its umbrella, particularly those trading onshore in the United States. Where it falls down is with decentralised exchanges, and those trading overseas, according to Mr Olson.

“There’s really nobody to talk to decentralised exchanges,” he says.

“But what they are going to be looking at is transactions, whether they are large or small.”

This means the US government is already talking to exchanges such as Binance, Coinbase and Gemini.

“Just like there’s reporting when someone trades on the New York Stock Exchange, well the same thing is going to happen when you’re trading on Coinbase,” Mr Olson says.

Cryptocurrency seizures likely to continue

In the year to date, the IRS has seized around $3.5 billion in crypto-related fraud activities, which pales in comparison to the crypto market cap which is more than $2.8 trillion.

But some estimates place fraudulent and illegal crypto activity in the vicinity of $20 billion, so there’s plenty of work to be done in cracking down on criminal crypto use.

Mr Creech says the infrastructure bill doesn’t directly relate to the IRS crypto seizures, but added that there is a loose connection, simply because so much crypto-related activity is thought to be under-reported.

The government is making an effort to get as much information as it can on this activity because taxpayers aren’t voluntarily reporting all their transactions.

“By passing this legislation and by making noise in the headlines about seizures, it gets taxpayers to take their reporting responsibilities more seriously,” he says.

One of the problems with cracking down on crypto-related fraud and illicit activity is simply being able to pinpoint what has happened and where the trades occurred. This is because of the decentralised nature of cryptocurrency and the fact trades can happen anywhere at any time.

However Mr Creech argues dabbling in crypto is a terrible way to commit crimes because all activity is held on the blockchain’s immutable ledger.

“People don’t run a red light when they see a cop parked at the intersection,” he says.

“And by putting these numbers out and talking about seizures the government is trying to discourage people from engaging in illegal activities.”

The question remaining is whether the infrastructure bill will encourage more companies to get into the crypto space.

Because fiat currency is currently subject to reporting and sourcing requirements, it encourages legitimate business activity, and it’s likely that the bill will also help business use crypto for the same reasons.

“But outside the legislation is the level of due care that’s needed for crypto,” says Mr Creech. “If you’re dealing with fiat currency there’s an understanding that all applicable regulations have been complied with.

“There’s definitely a risk out there with crypto, because it’s decentralized, that doesn’t exist with fiat currency.”

Meet the experts
James Creech
Senior Manager
Baker Tilly, US
Todd Olson
Director of Digital Assets, Financial Services
Baker Tilly, US
Brad Polizzano
Baker Tilly, US

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