Crypto Industry Prepares for Revenue Raid

Congress realizes the futility in regulating crypto, and is opting instead to stage a revenue raid upon it in the Infrastructure Bill.

August 2, 2021

By: Bobby Casey, Managing Director GWP

crypto revenue raid There are a lot of vices in the world. I distinguish that from actual evil. Vices are the things that are frowned upon in society, but really have no non-consenting victims.

For example, gambling. It really doesn’t hurt a soul to gamble. It’s not the best uses of one’s financial resources, and it has ruined a lot of people. But it’s a consensual act between the gambler and the entity taking bets. Much like drinking copious amount of alcohol, it amounts to nothing more than self-harm.

Vices have an odd place in society. They are frowned upon socially, and even politically. But, there’s really high demand for them (due in part to their taboo status), which means they are really profitable.

As legalization of alcohol, and then marijuana, has proven, the government can also get a taste for the profitability of vices.

Government has a spending habit it cannot shake. They are spiraling quickly down a very dark path. They can’t afford to ban things as much.

If you recall, there’s been a lot of drum and chest beating over cracking down on crypto. We’ve covered it quite a bit. The only real “vice” to crypto is the threat it poses to central banks as a potential competitor in the currency space.

As we all know, government HATES competition. We’ve been hearing the smear campaign from politician wonks for over ten years about how criminals, and money launderers, and tax evaders are the unsavory types that get tied up in the cryptocurrency world.

Obviously that’s no more true than those who get caught up in the fiat cash world. Prior to crypto, all that still existed. It was just done with cash.

If anything, cryptocurrencies are a vice as far as the government is concerned.

The government seems to be reevaluating their position on crypto. Naturally, they will continue to smear it publicly, but rather than drop the regulatory hammer it seems they are taking a different approach.

Crypto regulations have been slow to show because the FinCEN of the Treasury Department can’t figure out how to do that effectively. The encryption levels of blockchain technology are prohibitive.

If they can’t regulate it, then the only other thing they can do is tax it. Turns out crypto is a very popular and lucrative “vice”:

[T]he U.S. crypto industry is in the same position as the online gambling industry a decade ago when Congress regulated it out of existence. In the eyes of lawmakers, crypto companies—like online casinos—appear to be both sinful and rich, which makes them the perfect target for a revenue raid.

What does a revenue raid look like? There’s an example coming down the pike in the United States in the form of the Infrastructure Bill. We went into this earlier this year in April (“Here Comes the Infrastructure Bill“), and we led with how only roughly a third of it was being spent on actual infrastructure.

Naturally, the question of how congress intends to pay for it came up. At this stage of the negotiations, about $550 billion is slated for actual infrastructure (roads, bridges, etc.). Congress expects to pay for 5% of that ($28 billion) by coming after “crypto brokers”.

First of all, no one knows where $28 billion came from. I’m assuming it’s some goal someone pulled out of their ear.

Second, this isn’t just some idol threat. This is actually coming.

Third, there’s a reason for the quotes around “crypto broker”. It’s not what you think it is. Unto itself, that is horrible for crypto. But as it is written, the literal reading of it is much broader.

Typically what comes to mind when anyone says “crypto broker” are businesses like Coinbase or Basically platforms which allow merchants, consumers, and traders to transact with digital currency.

Here is how they plan to come for crypto:

Among other things, the updated plan proposes to tighten transaction reporting rules for crypto brokers as well as oblige businesses to report all transfers of digital assets worth $10,000 or more to the Internal Revenue Service.

Does that sound familiar? It should. That’s the same threshold for when banks report cash deposits and withdrawals on their SAR forms (Suspicious Activity Report).

It goes on:

“The provision includes updating the definition of broker to reflect the realities of how digital assets are acquired and traded. The provision further makes clear that broker-to-broker reporting applies to all transfers of covered securities within the meaning of section 6045(g)(3), including digital assets,” said the document.

Here’s the thing about the “updated definition of broker”, according to one crypto lawyer by the name of Jake Chervinsky:

“This definition is so broad, it could apply to nearly every economic actor in the US crypto industry, if read literally.”

There are two schools of thought here:

The first, is to work with the government and be involved in the regulatory process so it doesn’t get so heavy-handed.

The second, is to avoid the government because this is supposed to be an alternative to not an extension of fiat currency.

This divide has left the crypto industry absent from the political table, and vulnerable to these sorts of political policies.

Democrats want this Infrastructure Bill passed this month, and in full effect by 2023! Barring any infighting within the Democratic party, it’s likely going to pass along with this broad definition of “crypto broker” and nebulous $28 billion tax against them.

At this stage, the crypto industry is looking at retroactively disputing the definition of “crypto broker”, and appealing some of the more damaging aspects of the bill overall.

Regardless of the definition of “crypto broker”, even if it were narrowed back to the common use definition, this doesn’t bode well for the industry. These taxes will only result in hikes in the transactional costs.

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