Last ditch effort to narrow reporting requirements on crypto denied; alternative avenues still remain for industry to reduce scope of new rules

The Senate approved the Infrastructure Investment and Jobs Act (H.R. 3684) (the Act), advancing the new legislation to the House for consideration. In an effort to raise revenue for part of the overall $1 trillion in infrastructure spending, the Act contains language that would amend federal law on digital asset information reporting by expanding reporting requirements for brokers, including the requirement that businesses report all cryptocurrency transactions exceeding $10,000. Specifically, the Act modifies the definition of “broker” under Section 6045 of the Internal Revenue Code to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”  

In concert with great public outcry from the cryptocurrency industry and other interested parties, a number of Senators attempted to narrow the Act’s application. Sen. Wyden, for example, offered a manager’s amendment to remove certain classes of cryptocurrency validators and developers from being subject to the new reporting requirements. Joined by Sens. Lummis and Toomey, the amendment sought to clarify the term “broker” refers only to those persons who conduct transactions on exchanges where consumers buy, sell, and trade digital assets; revisions also included clarification that the new provision would not apply to those persons “mining or staking, selling hardware or software that an individual may use to control a private key, or developing digital assets or their corresponding protocols for use by other persons if such other persons are not customers.” In other words, new reporting requirements would be limited to entities with customers, and not be imposed on miners, stakers, or those developing and maintaining digital wallets. Sens. Portman, Sinema and Warner introduced a narrower amendment focused squarely on excluding proof-of-work miners and sellers of software or hardware to permit the use of private keys from the new provision. Sen. Cruz went as far as to offer an amendment striking the entire cryptocurrency reporting obligation.

Despite the numerous attempts to amend the legislation, the Act was advanced without any of the amendments passing with it. Sen. Shelby, in fact, struck down the amendments on non-related principles, indicating he would only have reserved his objection if senators wrapped into the Act an unrelated amendment to boost military spending by approximately $50 billion. Although the Act, and the revisions to Section 6045 implicating the crypto industry, now barrels ahead, there still remains ample opportunity to impact the legislation both when the House takes up the legislation later this month, or even when the IRS implements the new rules thereafter. Several lawmakers have indicated they are in discussions to introduce standalone legislation that defines cryptocurrency brokers more narrowly than the language in the Act. Moreover, the Treasury Department reportedly plans to clarify its definition of a “broker” even if the language of the Act remains unchanged. As members of Congress return to the Hill after this August recess, it will certainly be worth keeping a watchful eye on this provision, and potential changes to its language, to stay on top of the scope of any future reporting requirements on cryptocurrency.

Eversheds Sutherland Observation: While there appears to be a concerted effort to explicitly narrow the scope of the proposed legislative text, there is an opposing view that the proposed amendments are a solution in search of a problem.  Some have argued that by their terms the new reporting provisions only apply to parties with customers and that miners, stakers, hardware and software providers and similarly situated parties in the crypto supply chain do not have the type of customers that would trigger the new reporting obligations under the language as passed by the Senate.  Additional clarity is never a bad thing but with the unsettled state of play in both in the House and Senate working with narrow majorities in both houses to pass the infrastructure bill and the budget reconciliation bill, it remains to be seen whether additional clarity on this point will be sufficiently important to make the cut.