Dueling objections on procedural grounds scuttled hopes for a bipartisan agreement on cryptocurrency transaction reporting rules in the Senate on Monday afternoon.
Patrick J. Toomey, R-Pa., sought unanimous consent for a compromise amendment negotiated with lead negotiators on the underlying infrastructure bill as well as the Treasury Department to be added to the broader package.
But Richard C. Shelby, R-Ala., then sought consent for his own unrelated amendment, which would add $50 billion in defense spending to the infrastructure bill. Toomey was ready to accept that, but Democrats were not, and Budget Chairman Bernie Sanders, I-Vt., objected to that arrangement.
The compromise amendment announced earlier Monday by Toomey and Cynthia Lummis, R-Wyo., would exempt cryptocurrency miners and makers of wallets for storing private keys to access digital coins from requirements to provide information on people making trades to the IRS.
It would tweak the definition of a “broker” required to furnish tax forms each year to be narrower, a change aimed at making sure software developers behind person-to-person exchanges aren’t swept in, though it doesn’t directly exempt them.
“I think it’s fair to say that none of us think this is an absolutely perfect solution, but it is much better than the underlying text,” Toomey said Monday at an earlier news conference.
He said the compromise amendment would make sure that reporting is required only from those who conduct transactions on exchanges where people buy, sell and trade cryptocurrency, and he compared requiring reporting from groups like miners and wallets to mandating that the electric company for Merrill Lynch provide information on stock trades.
After the Senate floor objections later, Toomey said lawmakers would have to come back to the issue; "otherwise we're going to do a lot of damage" to the emerging industry. He told reporters that negotiators hadn't decided on next steps and added: "I'm frustrated with this whole place."
"There's an alternative, which is to allow people to have votes on amendments," Toomey said. "The other side doesn't want to have a vote on the Shelby amendment, even though they could defeat it."
Ted Cruz, R-Texas, had wanted to strike the entire cryptocurrency reporting language from the infrastructure bill. He said the impasse, if the bill was enacted without changes, could send the industry and jobs overseas.
"Cryptocurrency isn't tied to any particular piece of dirt," Cruz said on the floor.
He tried to offer his own amendment, but that request also ran into complications because Shelby sought consent for his defense amendment to be considered as well. Cruz objected to that request.
The compromise amendment has backing from the Treasury Department and Sens. Mark Warner, D-Va., Kyrsten Sinema, D-Ariz., and Rob Portman, R-Ohio, lead negotiators on the broader infrastructure package who got involved in amending the cryptocurrency provision as Treasury aimed to block a more expansive edit late last week.
Treasury Secretary Janet L. Yellen indicated in a statement Monday that she supports the compromise amendment, saying it would "provide clarity on important provisions in the bipartisan infrastructure deal that will make meaningful progress on tax evasion in the cryptocurrency market."
Toomey and Lummis said Senate Finance Chair Ron Wyden, whom they’d been working with on an amendment, has not signed on because he wants more expansive edits.
The Oregon Democrat indicated Monday morning that he wouldn't derail the deal, though his concern about explicitly excluding software developers from reporting obligations remained. Wyden led the first proposed amendment to the provision, with Toomey and Lummis, which would have directly exempted those developing digital assets or their protocols for others, unless they’re customers.
“I don’t believe the cryptocurrency amendment language on offer is good enough to protect privacy and security, but it’s certainly better than the underlying bill,” Wyden tweeted Monday.
Portman has sought to make clear throughout the debate that the intent of the underlying provision was that it shouldn't be applied to industry players that aren't involved in financial transactions for other customers. So, it's possible Treasury and the IRS could write regulations granting some leeway.
The cryptocurrency industry scrambled over the past week to soften reporting obligations added to the infrastructure bill that were estimated to raise $28 billion to partially offset the bill's $550 billion in new spending. Portman was behind the provision adding those involved in trades of digital coins such as Bitcoin and Ethereum to broker reporting rules that require tax forms be provided to customers and the IRS with the name, address and gross proceeds from users’ transactions.
The provision also requires business transactions of over $10,000 in cryptocurrency to be reported to the IRS, adding digital coins to rules that already exist for large cash payments. That piece of the legislation has not generated significant pushback.
Groups representing blockchain networks, trading platforms and crypto investors argued the broker rules could apply to intermediaries who don’t have the information they’d be required to give the IRS, and that the mandates could push business overseas. Wyden, Toomey and Lummis expressed similar concerns and first took up the issue, before Treasury stepped in to oppose their amendment.
Treasury wanted the ability to apply reporting rules to developers of person-to-person exchanges, according to a GOP aide. It was unclear on Monday afternoon whether Treasury views the latest amendment as allowing room to require reporting from developers.
The agreement would specify that broker reporting rules do not apply to anyone engaged in validating distributed ledger transactions — sometimes referred to as mining or staking, though there are other methods — without providing other services. There are also exemptions for businesses and individuals who sell hardware or software for controlling private keys to access cryptocurrency, known as wallets.
The original Wyden-led amendment with Toomey and Lummis had a third exemption for those “developing digital assets or their corresponding protocols for use by other persons.”
The latest amendment instead narrows the definition of broker for crypto to any person who regularly “effectuates transfers of digital assets on behalf of another person.” The bill’s current text defines a broker as anyone “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
Senators involved in amendments and the administration have agreed throughout that the provision should apply to centralized crypto exchanges.
Treasury’s tax proposals this year included reporting obligations for crypto aimed at narrowing the tax gap, the difference between taxes owed and paid to the federal government. IRS Commissioner Charles P. Rettig has estimated that divide is about $1 trillion per year.
The Biden administration had backed an amendment from Warner, Portman and Sinema that exempted some — but not all — validators and developers of wallets, leading to talks between the senators and Treasury that eventually produced a deal. It came hours before final passage of the infrastructure bill was expected.
The cryptocurrency industry got on board with the amendment that Toomey and Lummis announced. Blockchain Association Executive Director Kristin Smith said Monday in a statement that the group “fully supports” the proposal, though it “leaves work to be done.”
“While long-term clarifying fixes are needed, we encourage the Senate to support the compromise — and, moving forward, to work with industry to proactively craft smart policy to keep the U.S. at the forefront of crypto innovation,” Smith said.
Debate on the amendment drew in big names in tech — including Tesla Inc. CEO Elon Musk and Square Inc. CEO Jack Dorsey — who urged lawmakers to lighten the reporting rules and back the Toomey-Wyden-Lummis efforts.
Other big names not directly involved in the industry, such as Kiss bassist Gene Simmons, also got involved in trying to keep the nascent industry as lightly regulated as possible.
Toomey, the top Republican on the Senate Banking Committee and a Finance panel member, and Lummis said that because this is a new industry evolving rapidly, Congress may have to soon revisit rules set around cryptocurrency.
Lummis said some lawmakers will speed up efforts to legislate definitions in the crypto space because of the tax reporting rules, and that the effort to lobby senators on the issue in recent days will lead to broader interest in cryptocurrency in the Senate.
“The fact that Treasury got a jump on us in trying to define ‘broker’ in this bill has put us in a position where we’re starting that work now of defining terms that are used in this space that have a significant impact on those that are innovating in this space,” Lummis said. “We can’t afford to get this wrong. We need to ensure that people aren’t trying to avoid taxes by sheltering their money in digital assets, but we have to do it in a way that doesn’t stifle innovation.”