Treasury pushes global crypto data-sharing rules in budget bill

Proposal would require cryptocurrency exchanges to report foreign owners of U.S. accounts

Rep. Tom Emmer is chairman of the House GOP campaign arm and a co-chair of the House Blockchain Caucus. (Bill Clark/CQ Roll Call file photo)
Rep. Tom Emmer is chairman of the House GOP campaign arm and a co-chair of the House Blockchain Caucus. (Bill Clark/CQ Roll Call file photo)
Posted August 30, 2021 at 6:32pm

The Biden administration is urging Democrats to include more rules for tax compliance on cryptocurrency transactions in the upcoming $3.5 trillion budget reconciliation package, after a provision in the Senate-passed infrastructure bill spurred a major industry lobbying offensive to limit the reach of new mandates.

The administration is hoping to add to the filibuster-proof package requirements that cryptocurrency businesses report information on foreign account holders so that the U.S. can share information with global trading partners, according to an administration official who wasn't authorized to speak for the record.

Included in the Treasury Department’s revenue-raising proposals released earlier this year, the proposal would result in information U.S. officials could automatically share in exchange for data on U.S. taxpayers trading digital currencies in other countries, which the government would use to enforce tax compliance.

A separate, Senate-passed infrastructure bill would add cryptocurrency exchanges and others in the business of facilitating transactions involving Bitcoin, Ethereum and a variety of other virtual tokens to the definition of "broker" that must report capital gains and losses to the IRS and to customers. The Treasury proposal Congress hasn't yet taken up would expand the information-reporting requirements to "beneficial owners" behind legal business structures set up by foreign account holders to buy and sell cryptocurrencies.

Under U.S. law, "beneficial owners" that traditional financial institutions are required to identify at times — for instance, during money laundering investigations —include individuals who own at least a 25 percent equity stake in the company or those with "significant responsibility to control, manage, or direct" the legal entity. 

According to Treasury, the proliferation of shell companies that U.S. taxpayers set up overseas to try to avoid tax, including on cryptocurrency gains, requires stricter reporting measures. 

"The global nature of the crypto market offers opportunities for U.S. taxpayers to conceal assets and taxable income by using offshore crypto exchanges and wallet providers. U.S. taxpayers also attempt to avoid U.S. tax reporting by creating entities through which they can act," according to Treasury's "Greenbook," as its annual list of revenue proposals is known. "To combat the potential for crypto assets to be used for tax evasion, third party information reporting is critical to help identify taxpayers and bolster voluntary tax compliance.

Reciprocal access

To get access to that information, however, U.S. officials need to be able to provide the same data to other countries on their own citizens with U.S. accounts, part of what are known as "tax information exchange agreements." The Treasury proposal would enforce the new rules starting in in 2023 and apply to cryptocurrency exchanges and providers of digital "wallets" for account holders. Such "hosted" wallet providers include trading and investment platforms like Coinbase and Gemini. 

The new system would be similar to obligations under a 2010 law that requires certain foreign financial institutions to report information on U.S. taxpayers’ accounts to the IRS, according to the administration official. The issue has come up in discussions with the tax-writing committees, House Ways and Means and Senate Finance.

Democrats are searching for ways to generate revenue that can cover the cost of their massive budget package that's expected to address child care, clean energy, paid leave, Medicare and other major pieces of Biden’s domestic policy agenda. Top Democrats including Speaker Nancy Pelosi have said they want the bill to be fully paid for, and moderates in both chambers are raising concerns about its price tag.

The fiscal 2022 budget resolution gives Ways and Means and other House panels a Sept. 15 deadline to draft their pieces of the reconciliation bill. Ways and Means Chairman Richard E. Neal, D-Mass., has said he plans to spend several days marking up his portion, starting Sept. 9.

Measures to boost tax compliance are set to help fund the package, along with raising taxes on corporations and individuals making more than $400,000 annually. IRS Commissioner Charles P. Rettig has estimated the “tax gap” — the difference between taxes owed and paid to the federal government — stands at $1 trillion each year, with a portion coming from unpaid taxes on cryptocurrency trades.

The bipartisan infrastructure bill provision is estimated to raise $28 billion over a decade; the White House wants to go much further and require information reporting on all financial accounts with gross inflows and outflows or a fair market value greater than $600 annually.

The more sweeping proposal, which could generate more than $300 billion over a decade, is also on the table for reconciliation, though it's encountered some pushback due to potentially invasive requirements for banks and customers with relatively small accounts.

Additional cryptocurrency rules could be a draw as Democrats aim to unite the more moderate and progressive wings of the party. 

The international compliance proposal, which Treasury estimates would generate "negligible" additional revenue on top of the other new requirements, is one Democrats may be able to get on board with, said Jorge Castro of law firm Miller & Chevalier, a former tax aide to congressional Democrats and counselor to the IRS commissioner.

But Castro said in an interview that the proposal would likely generate a lot of industry attention and could be burdensome on cryptocurrency-related businesses because they’d involve both more U.S. regulation as well as information sharing for enforcement in other countries.

Shut out of infrastructure amendments

New cryptocurrency reporting rules already led to a showdown in the Senate this summer as lawmakers in that chamber tried to offset $550 billion in new spending in the bipartisan infrastructure bill.

Cryptocurrency businesses and investors balked at the new broker reporting rules, pressuring lawmakers to drop or soften them in the days before the bill passed the Senate. They gained traction, but efforts stalled because of a larger dispute on amendments to the bill in the Senate. The House adopted a rule to vote on the package next month that keeps it closed to amendments, a move that avoids having to send it back through the Senate.

That’s left the cryptocurrency industry looking to another legislative vehicle to make changes that could be in place before the cryptocurrency regulations would take effect. The Blockchain Association, an industry group, is looking to tack changes that limit the definition of a broker to exclude miners, validators, makers of wallets and developers of decentralized or person-to-person exchanges onto the reconciliation package, among strategies they’re considering.

They have allies in both parties who've been concerned with the scope of the rules, including Senate Finance Chair Ron Wyden, D-Ore.; Senate Banking Ranking Member Patrick J. Toomey, R-Pa.; Sen. Cynthia Lummis, R-Wyo.; and the House’s Blockchain Caucus, whose co-chairs include Rep. Tom Emmer, R-Minn. Emmer is also the head of the House GOP's campaign arm, the National Republican Congressional Committee.

Emmer said in an interview before the House rule for floor debate was adopted that blocking amendments wouldn’t stop the blockchain-focused group of lawmakers from trying to make sure cryptocurrency reporting rules don’t apply too broadly, including to decentralized exchanges. The new reporting rules misunderstand these exchanges and cryptocurrency in general and shouldn’t have been used to pay for a largely unrelated bill, he said.

Treasury is preparing guidance aimed at quelling some industry and lawmaker concerns about the reach of the bipartisan infrastructure bill’s cryptocurrency rules. The department plans to reiterate the rules won’t apply to certain parties that industry has warned don’t have the information on coin traders that the IRS would seek, such as miners.

Treasury has pushed against limiting rules from applying to decentralized and person-to-person exchanges, a matter the department believes should be left to the regulatory process to avoid court challenges and to give flexibility for crafting rules that aim to avoid business shifting to exchanges that lack reporting obligations, according to the administration official.