The cryptography regulation incorporated into the infrastructure bill raises oversight issues; Recipients should collect tax IDs on transactions over $ 10,000
A little-known law of 1984, originally intended to discourage large money transfers, was converted back into crypto regulation and incorporated into America’s massive infrastructure bill.
The new rule would require recipients of an encrypted payment totaling at least $ 10,000 to collect and report the sender’s Social Security number or tax identification number to the Internal Revenue Service (IRS). Failure to do so could lead to a felony charge.
Critics argue that this new rule would hold back investment at all levels and could be used as a monitoring tool that circumvents other existing laws. This is not the only point of concern in the infrastructure bill, however; it also qualifies those who “regularly” transfer digital assets as “brokers”, but in such a way that a vague definition could subject many of them to the same regulations as those applied to securities brokers.
Sprawling infrastructure bill contains attacks on digital assets
Signed on November 15, the 2,700-page infrastructure bill contained so many initiatives that it is highly likely that some of those who voted for it were unaware of all it contained. It has certainly been difficult for the general public to keep pace.
The crypto regulatory elements in the infrastructure bill have not received as much media attention as some of the other elements. The news could come as a surprise to some retail traders and small business operators, who may soon find themselves subject to new reporting and regulatory requirements.
Although the terms of the crypto regulations are not expected to come into effect until 2024, the law that serves as their basis dates back to 1984. Section 6050i of the IRS code was passed that year primarily as a countermeasure measure. against money laundering, seeking to close the loophole of using cash to evade reporting requirements and forcing large transactions at banks where the flow of money can be much more easily monitored.
This law could now apply to anyone receiving cryptocurrency. 6050i would require anyone receiving a transfer of crypto or digital assets of at least $ 10,000 to report to the IRS a valid tax ID number for the sender within 15 days, along with other personal information. The existing 6050i conditions make failure to report a cash payment of this nature a felony with a mandatory fine and potentially resulting in up to five years in prison.
A particular complication in applying this old law to new technologies is that the “sender” may not be a separate identifiable person, or even a company. The sender can be a decentralized exchange, a group of people, or just an anonymized individual such that the collection of tax information is not possible. It is not clear from the wording of the new crypto regulations how receivers should handle these situations, or whether they would simply be required to decline any transaction for which they cannot obtain the required information. In their current state, the new rules could completely eliminate the world of decentralized finance.
An amendment to the crypto regulations that would have exempted crypto miners and developers of digital asset wallets was submitted to the Senate in August, but was not passed. While the new reporting requirements are now on track with President Biden’s signing, there is still more than two years left for new legislation to be passed that could replace the terms of the infrastructure bill. The IRS has also had wide latitude to create definitions of what a “broker” and “digital asset” would be under the new rules, and crypto lobbyists have already lined up to influence that process.
Crypto regulation, a lower priority but persistent target of the Biden administration
The Biden administration has signaled that it has been in favor of strict crypto regulations since taking office, but before the infrastructure bill, little had actually happened. Various administration figures have cited its use for ransomware payments and the financing of terrorism and other heinous crimes as a reason to take action, but the interest is probably at least as much in recovering the potential lost tax revenue and to keep the money in the fiduciary system.
Some critics see the terms of the infrastructure bill not only regulating the market to the death, but also a privacy nightmare waiting to happen. All receivers, even individuals and businesses with little or no oversight, would be required to collect tax information (potentially including a social security number for individuals) associated with names and addresses. All of this could then be linked to a transaction history. Suddenly millions of highly sensitive digital records would be created, many of them in the hands of people and entities who are not regulated in terms of the handling of personal information.