a tax amendment highly contested by the cryptocurrency industry

A tax declaration obligation for companies in the sector

If some think that French taxation is one of the harshest when it comes to crypto-assets, perhaps they should take note of the potential change in US taxation on this subject. Here, it is not the tax rate that is the subject of debate, but rather the reporting obligations.

Originally, cryptocurrencies were rather far from what is called the Biden plan (officially, Infrastructure Investment and Jobs Act) of about $ 1,200 billion, especially intended to revive the US economy. But, as in France, some laws are a bit โ€œcatch-allโ€ and sometimes contain provisions unrelated to their title.

It all started when the definition of the term broker was extended to all those handling digital assets. Following this change, many voices were raised against a definition considered too vague since digital assets are not clearly defined.

However, in the United States, being considered a broker requires carrying out many additional obligations, including tax declarations to the Internal Revenue Service (IRS). This declaration would be mandatory in particular when the value of bitcoins (BTC) or other cryptocurrencies received would exceed 10,000 dollars.

To put it simply, the IRS wants to know the name of every American making capital gains in cryptocurrency and tax those who fail to report their earnings.

An amendment implicitly targeting proof-of-stake (PoS) and decentralized finance (DeFi)

To remedy this imprecision of the broker’s definition, two amendments have been proposed.

The first, rather favorable to the sector, aims to exclude from the definition of a broker minors, validators, sellers of external portfolios or developers of digital assets, i.e. all non-financial intermediaries.

This clarification is welcome, because, as it stands, the new definition of the broker seemed to include a bit of everyone, from Coinbase to an average natural person receiving a value of 10,000 dollars in cryptocurrency.

That was without counting on a second amendment from Senator Portman. It only excludes miners and developers using proof-of-work (PoW) from the broker’s definition.

Thus, without saying so explicitly, the amendment creates a difference between, on the one hand, those using proof of work and, on the other hand, those validating transactions using proof of stake and the Challenge. The latter would then enter into the definition of the broker and would thus be subject to reporting obligations to the IRS.

The US cryptocurrency industry was surprised to learn that the Biden administration supported this Second Amendment.

A provision signing the death of the US cryptocurrency industry?

Senator Portman’s amendment, which is none other than the one who proposed the broker’s modification to include crypto-assets, is very unpopular.

Indeed, almost all DeFi projects do not use PoW. Regarding the reporting obligation itself, these projects do not have the means to identify their customers. Also the Ethereum blockchain plans to switch to PoS once version 2.0 is effective.

In other words, almost all of the players in the crypto world would remain affected by this amendment.

Unable to meet the reporting obligations of the US tax administration, some believe that many projects would be forced to close permanently or leave US territory. This is what Sam Bankman-Fried (SBF), founder of the FTX exchange platform, has put forward:

10) So their choices, basically, would be:

a) shut down
b) move out of the US

They couldn’t choose to comply even if they wanted to.

So the impact would just be to force crypto infrastructure and innovation offshore.

– SBF (@SBF_FTX) August 6, 2021

This amendment is reminiscent of the latest guidance from the Financial Action Task Force (FATF) which also targeted the DeFi sector, this time explicitly.

However, it is questionable whether the writers of these reports or amendments really understand how decentralized finance works, where it is simply impossible to know with certainty the identity of people on a platform such as Uniswap or PancakeSwap.

The final vote on this amendment is scheduled for Saturday, August 7. To be continued …

๐Ÿ‘‰ To read – FATF Guidance: a potential strengthening of constraints for DeFi players

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About the author: Benjamin Allouch

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Lawyer specializing in digital law and personal data. He quickly became interested in bitcoin and blockchain technology, and founded the blog bitcoin-blockchain.fr. He is interested in the emergence of blockchain law and the legal consequences of this technology.
All articles by Benjamin Allouch.

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