There’s Still Time to Fix Congress’s Crypto-Tax Mess

Thanks to a series of Marx Brothers-caliber legislative screw ups, the U.S. Senate yesterday passed a tax provision that even its own authors claim they don’t really support as written. Even the guy who killed a last-ditch attempt to fix it yesterday, Alabama Sen. Richard Shelby, said he actually supports the fix.

So, yeah, this is nobody’s fault, nobody’s responsibility. I’m sure everyone in the Senate really gave it their honest, well-intended best. I’m sure passing laws so broken they’re simultaneously industry-destroying and unenforceable is a once-in-a-lifetime event in that august body. I’m sure they’re not just making it all up as they go along for the sake of political convenience.

And yet there it is, in the guts of the huge infrastructure bill, a tax reporting requirement for “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” As the industry has repeatedly warned, that language could rope in a wide range of unintended players, including miners and software developers who have no ability to meet its requirements.

So what happens next? Should every crypto business in the United States start packing their bags to move overseas so that they don’t have to comply with an impossible law?

Luckily, there’s still time, though the solutions from here will be even more challenging and complex. The infrastructure bill now goes to the House, where it will be considered and debated for more weeks or, more likely, months. After that, it will be translated into regulatory language by the Internal Revenue Service and the Treasury Department. At both of those stages, there are opportunities to mitigate the potential damage of the measure.

Jerry Brito, whose crypto lobbying group Coin Center took the lead on the effort to fix the Senate language, believes there’s hope for revisions in the House, saying that “we can try to get a whole new amendment from scratch that can address our concerns.” Even if those efforts are successful, though, the House and Senate versions of the bill would have to be reconciled, itself a long process with unpredictable results.

Even if the House revision effort fails and the current language becomes law, it must then be translated into specific rules by the IRS and the Treasury Department. That usually involves a public feedback period and is likely to make clear what specific entities are affected by the language.

“Even after this whole legislative process is done, there are often significant opportunities for industry and taxpayers to provide their input into the rules and regulation,” said Rochelle Hodes, Principal, Washington National Tax at the consulting firm Crowe LLP.

Hodes also thinks statements Sen. Rob Portman (R-Ohio) has made about the provision will influence how it is interpreted by regulators. On Aug. 3, before the fracas turned into a total meltdown, Portman wrote on Twitter that the measure “does not impose new reporting requirements on software developers, crypto miners, node operators or other non-brokers.” On Monday, he reiterated that clarification before Congress. A co-sponsor, Sen. Mark Warner (D-Va.), also stated on record that the measure was intended to target “businesses,” which could help shield protocols from rulemaking.

According to Hodes, such statements have a significant role in shaping how a law is implemented. “[The IRS and Treasury] are going to take into account not just the legislative language, but legislative history … a statement from one of the sponsors of the provision on the floor of Congress that gets into the congressional record, that is fairly persuasive legislative history.”

That said, Hodes warns that such statements shouldn’t be relied on to get the desired rulemaking result.

Statements of intent that affected rulemaking would remain significant long-term. According to Hodes, regulators regularly delve into centuries-old records to clarify the original intent of the drafters. Fifty years from now, when all involved senators have gone on to their rewards, their statements this week will still matter.

There is no easy final summation of what this all means. We’re in limbo, and things could go any number of directions. With a lot of work and uncertainty ahead, now is a moment to take a deep breath and prepare for months more of busy work trying to fix something legislators swear they didn’t even really mean to break in the first place.

UPDATE 8/11 21:36: Rochelle Hodes' name and title have been updated.