Is not reporting a felony? What impact will the U.S. investors fry the infrastructure bill have?

The U.S. House of Representatives passed the Infrastructure Investment and Employment Act on November 5, 2021, with a vote of 228-206. President Biden is expected to complete the signing of the bill in the near future and make the bill into law.

The approximately US$1 trillion infrastructure plan includes US$550 million in new expenditures and will fund improvements to roads/highways, bridges, public transportation, clean water sources, power grids, broadband Internet development, and network security. Part H of the bill discusses how to fund new expenditures, including those related to digital assets (cryptocurrencies).

Immediately, the bill caused discussions in the encryption community on Twitter, and most of the members were dissatisfied with the encryption provisions in the bill.

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Even three months ago, the petition for “removal of encryption regulations in the Infrastructure Act” was back in the eyes of the encryption community.

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So what are the unfavorable measures for the encryption industry hidden in the Infrastructure Act? Let’s take a closer look.

“Broker” and information report

1. All cryptocurrency exchanges ( Coinbase , Robinhood, etc.) are now regarded as the same “brokers” as traditional brokers (Fidelity, etc.).

Specifically, the bill stipulates that “brokers” are “anyone responsible for regularly providing services for transferring digital assets on behalf of others”, but without a clear scope, application developers, wallet providers, and miners may still be returned The category is “broker”.

2. The definition of “digital assets”.

“Digital asset” is defined as “any digital representation recorded in a password-protected distributed ledger or any similar technology.” ‍

3. Digital assets are regarded as securities, similar to stocks, bonds, and certain types of commodities.

This has always been the most debated issue in the crypto community, and the bill finally gave some clear answers:  digital assets will be treated like capital gains/losses from securities . In the past, digital assets were classified as property and therefore taxed based on gains or losses. So now the tax treatment of digital assets is basically the same as before: capital gains must be taxed.

However, securities also face the supervision of the US Securities and Exchange Commission (SEC), and the legislation does not mention the SEC. The SEC will allow traditional securities companies such as stocks to submit quarterly reports and provide prospectuses detailing the risks. Will cryptocurrencies be required to submit similar documents to the SEC? There are no specific details yet.

4. Information report.

Crypto exchanges must provide customer information to the IRS. Currently, crypto exchanges have not yet done this, although some exchanges have already sent tax returns to customers (for example, Coinbase sends 1099-MISC, which only covers rewards from Coinbase, not capital gains).

Now you need to report the following information to the IRS: (1) the name, address and phone number of each customer; (2) the total income from any sale of digital assets; (3) the capital gain or loss, and whether the capital gain or loss is short-term (Hold for one year or less) or long-term (hold for more than one year).

5. Heavy fines for non-reporting.

If the crypto exchange fails to report such information, it will pay each customer a fine of $250, up to a maximum of $3 million (according to Section 6722 of Title 26 of the United States Code, “Failure to provide correct payee statement”) .

Over $10,000, everyone reports

The Infrastructure Act changes section 6050I of Title 26 of the U.S. Tax Code. To classify digital assets worth more than US$10,000 as “cash”, anyone engaged in a transaction or business who receives more than US$10,000 must submit a report.

The IRS explained that this type of information “helps law enforcement agencies combat money laundering, tax evasion, drug dealing, terrorist financing, and other criminal activities.”

This point is also controversial, we will explain in detail next.

Effective time

The start time required by the Infrastructure Act is January 1, 2023, so it will affect the tax returns filed in 2024. However, crypto transactions in 2021 and 2022 will not be restricted. This means that crypto exchanges do not need to send you tax returns (for 2023 taxes) before 2024, but it is expected that various exchanges will start to comply sooner.

The controversial 6050I clause

6050I is different from the “broker” clause mentioned earlier. This is a separate provision, an amendment to Section 6050I of the U.S. Tax Code, which requires certain cash “receivers” with a value of more than $10,000 to report to the government the name, address, and social security number of the “sender”. In the Infrastructure Act, digital assets are also classified as “cash”, which means that both parties to an encrypted transaction need to provide each other’s information.

This is an unusual law. Although it is part of the tax law, it is not a real tax regulation. First, unlike other IRS information reporting requirements, transaction reports must be submitted within 15 days. Violation of this rule will be a felony; second, it is not limited to “brokers” or crypto exchanges. It applies to all companies. Including individuals. The only ones not subject to the 6050I clause are banks and financial institutions. 

This is also what scares the U.S. crypto community the most. Some lawyers pointed out that NFT and DeFi can hardly comply with the law.

main target

The main goal of this clause is to collect information on users of encrypted assets. In short, Section 6050I is an anti-crime law and the government uses reports received to investigate suspicious activities.

When there are the following 5 factors, any person receiving payments must report the personal information of the “payer” or “sender” to the government:

1. You receive: the “receipt” of your payment-the transfer record.

2. Digital assets: defined as “any digital representation of value” using distributed ledger technology.

3. Worth more than USD 10,000 

4. In the process of “trade or business”: “transaction” is also a business, even individual participation is counted.

5. Unless a federally regulated “financial institution” has already reported the same transaction and personal information.

Controversy over DeFi

Clause 6050I will cause special problems for DeFi, because if a report is required, the report will include the name, address, and tax number of the person who sent the digital asset. 

Consider a simple example of an automated market maker on a decentralized exchange. (Centralized exchanges belong to “financial institutions”)

Example 1:

Andy in the liquidity pool by destroying LP to withdraw assets. It’s hard to argue that the assets withdrawn were not Andy’s “receipts.” In addition, according to the interpretation of “transactions” in the bill, income will accumulate over time to meet the $10,000 threshold. 

Example 2:

Bob uses a decentralized exchange to exchange token A for token B. The token B received by Bob may also be a “receipt.”

According to current regulations, when cash is received, everyone in the transaction is required to be listed in the report. Now the regulations are revised and digital assets are also equivalent to cash. Then Andy and Bob need to report all the information of the token sender.

But this is also controversial. Generally speaking, the tokens obtained from liquidity pool withdrawals cannot be traced back to one or more specific accounts, let alone specific people. Maybe the tokens are not “received” from one or more people, but “received” from the smart contract. If it is a centralized exchange, the person sending B tokens may not be the trader on the other end, but the exchange itself. After all, the person who put these tokens in the liquidity pool did not intend for Bob to receive them.

Then, it can be said that the “person” to be reported in the example is a DEX, which is a collection of smart contracts.

This will cause two situations. If the “sender” of the report to the IRS is DEX, even if there is no address and tax number, the report may be deemed compliant by the IRS. Or the recipient may argue that the absence of a “person” to receive the digital asset makes the transaction beyond the scope of the regulations.

“This effort to apply the 6050I clause to digital assets, especially DeFi transactions, is really absurd.”

Example 3:

Charlie took a fancy to a very beautiful NFT and sent his cryptocurrency to the smart contract for exchange. After the dust settled, Charlie owned the NFT (because NFT is a digital asset under the bill, it may also be required to report to Chaelie). 

David is an artist who created the NFT. He received Charlie’s cryptocurrency as payment for the NFT. (Fees received in NFT transactions may also impose reporting obligations.)

In fact, David received the cryptocurrency from the smart contract. However, it is unbelievable that the regulations exempt David from reporting Charlie’s personal information just because it involves smart contracts.

In summary, the application of Article 6050I to digital assets, especially DeFi transactions, is indeed a bit absurd. The old laws are simply not suitable for this new technology. It is hard to imagine how 6050I will be applied to digital assets, which is another reason why the proposal has been criticized by the crypto community. 

According to Jake Chervinsky, an encryption law expert in Washington, DC, the new bill may not bode well for the encryption industry, but pointed out that there are still important details that have not yet been finalized.

“Yes, the encryption bill is as bad as it was a few months ago. Yes, the impact of Clause 6050I has not been fully explored. No, you don’t need to call your representative because we are no longer in our control.”

The important thing is that the bill will not happen right away and will not take effect until 2024 (for the 2023 fiscal year report). For encryption proponents, the period between now and the law’s entry into force may be a moment of success or failure for the encryption industry.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/is-not-reporting-a-felony-what-impact-will-the-u-s-investors-fry-the-infrastructure-bill-have/
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