How cryptocurrency became a controversial part of the $1 trillion US infrastructure bill

Levying taxes on digital currency transactions would raise much-needed revenue to pay for the plan, but critics say it will have unintended consequences

The proposal would impose new tax reporting obligations on cryptocurrency brokers

A major bipartisan infrastructure bill in the US hit an unexpected hurdle when it ran afoul of the under-regulated and hyper-vocal cryptocurrency community.

The infrastructure bill, officially titled HR 3684, sets out a plan to spend $1 trillion to build roads and bridges, rehabilitate public transport and expand clean energy and vehicle electrification.

As politicians grappled with how to pay for it, a bipartisan provision emerged to levy taxes on digital currency transactions, raising about $28 billion in tax revenue over the next 10 years, the Washington Post reported.

Outside critics and a bipartisan coalition in the Senate voiced concern over how much of a hand government should have in the traditionally unregulated world of digital currencies, arguing that overreach may curb innovation.

The fresh debate was an unexpected hurdle on a long road to passing the Biden administration's infrastructure plan, touted as the path to economic recovery from the Covid-19 pandemic.

Those against the bill are honing in on one word in the tax provision, “broker”, and how it should be defined.

The proposal would impose new tax reporting obligations on cryptocurrency brokers, which enable traders to buy and sell cryptocurrency.

The bill identifies a “broker” as anyone “responsible for and regularly providing any service effectuating transfers of digital assets on behalf of another person”.

Under that definition, anyone identified as such would be subject to tax reporting requirements. This appears to include so-called miners who rely on a "proof of work" system by solving algorithms with computers and software that, if correct, verify and clear crypto transactions.

The decentralised nature of cryptocurrency and how transactions are recorded on a blockchain mean that these transactions are not so easily traced back to individuals. By design, cryptocurrency marketplaces do not easily allow for the collection and reporting of information on users.

Miners do not have customers, so they would not be able to have access to the information necessary to complete a 1099 tax form, required under the new provision, Tech Crunch reported.

A joint letter about the bill’s text was sent to Congress last week and it was signed by FinTech companies such as Square, Coinbase and Ribbit Capital. The letter declared that the proposal was akin to “financial surveillance” and would lead to unintended consequences for cryptocurrency miners and developers, Tech Crunch reported.

The Electronic Frontier Foundation and Fight for the Future, two privacy-minded digital rights organisations, also came out against the bill.

“We feel strongly that policies that [affect] people’s basic civil liberties and people’s rights in the digital age should never be tacked on to legislation like an infrastructure bill,” Evan Greer, director of Fight for the Future, told CNN.

Two amendments have been proposed to try to resolve the stalemate.

Senators Cynthia Lummis, a Republican from Wyoming, Ron Wyden, a Democrat from Oregon, and Pat Toomey, a Republican from Pennsylvania, proposed reinstating protections for individual investors, which would include miners, software designers and protocol developers, from being obligated to report data that would be impossible for them to collect.

A competing proposed amendment from senators Mark Warner, Democrat from Virginia, Rob Portman, Republican from Ohio, and Kyrsten Sinema Democrat from Arizona, which is also backed by the White House and Treasury Secretary Janet Yellen, would exempt traditional cryptocurrency miners who participate in time-consuming “proof of work” systems such as Bitcoin and ethereum from the financial reporting requirements outlined in the tax provisions.

Mr Portman said on Sunday during a Senate session that “cryptocurrency is a digital asset that more and more people are investing in. We should want that to continue, and continue in a healthy and sustainable way".

A final vote is expected on Monday or Tuesday.