The newly-enacted infrastructure law contains a large pay-for provision aimed at trapping lost tax revenue from cryptocurrency transactions which currently fly under the Internal Revenue Service’s radar. While this is an important step in moving the classification of cryptocurrencies away from property, the new tax provisions are overly broad and a missed opportunity for classifying cryptocurrencies as a unique financial instrument.
II. Cryptocurrency Tax Provisions in the Infrastructure Bill
The infrastructure law contains three changes to the tax code’s treatment of cryptocurrency.
First, the definition of “broker” is expanded to include parties who deal with cryptocurrencies. The pertinent section now includes: “Any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
Digital assets are also added to the list of specified securities. A digital asset is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” Because of this, cryptocurrency is now subject to the same reporting requirements as other specified securities, namely Form 1099-B filings to record sale and basis. Failure to report results in monetary penalties for cryptocurrency exchanges.
Lastly, digital assets valued at $10,000 or more can be considered cash under Section 6050I of the code – which means that any person engaging in a trade or business that receives more than $10,000 in cryptocurrency must file a Form 8300, which requires information including name, address and tax identification number of the person from whom the payment was received. Failure to do so can result in civil consequences, and also felony charges.
The cryptocurrency tax treatment changes are the largest revenue raiser in the bill, with the Joint Committee on Taxation estimating the new reporting requirements would raise $28 billion over 10 years.
III. Contextualizing Cryptocurrency Taxation
These changes only further the patchwork approach taken to cryptocurrency taxation since guidance was first released in 2014. In that guidance, the IRS said cryptocurrency should be treated as property, the tax treatment of which is quite simple—taxable events arise when cryptocurrency is traded for other cryptocurrency or cash, while buying cryptocurrency with cash sets its basis.
Since 2014, the market has grown more sophisticated. Crypto transactions have evolved to include, among others, borrowing, lending, mining, and providing liquidity on decentralized exchanges. The tax code has not adapted as quickly. A ruling was issued in 2019 on hard forks and air drops of cryptocurrency, but it did not address many open questions including the applicability of wash sale rules and de minimis exceptions. Likewise, in the summer of 2021, the IRS issued a memo excluding certain cryptocurrency exchanges as being like-kind under rule 1031, but left the larger wash sale and de minimis exception questions unanswered.
The targeted reach of these changes is important for two main reasons. First, cryptocurrency is classified as property but used by many like a security, it became a tool for investment gains with minimal, or positive, tax consequences. Investors are able to engage in wash sales–selling cryptocurrency to collect a capital loss to offset capital gains, and buying it back immediately–with no consequences, a practice that is penalized for other securities. Second, the reliance on self-reporting income from sales or exchanges of cryptocurrency is complicated (many have to manually keep track of their own basis and gains), and easy to forego, since many transactions have little traceability. Both of these vulnerabilities have led to lost tax revenue.
In answer, the IRS has doubled down on its enforcement of cryptocurrency tax compliance. IRS agents have confirmed that they are improving at tracing and attributing cryptocurrency transactions, using data analytics tools. Another tool available to the IRS has been the John Doe summons, which were issued to Coinbase in 2016 and to Kraken and Circle this year. The enforcement push has been formalized as of this year via Operation Hidden Treasure, which is aimed at finding, tracing and attributing cryptocurrency to U.S. taxpayers.
Even for those individuals who don’t use cryptocurrency as a tax haven, its tax treatment at times remains a mystery. For example, questions still exist over how to treat charitable donations of cryptocurrency. Tax practitioners are also working to dispel myths in order to get their clients to self-report correctly.
Congress is working to correct cryptocurrency taxation vulnerabilities like the wash sale rule as part of the budget reconciliation bill. Yet the opportunities to evade taxation abound, and require more targeted approaches than those taken so far.
IV. The New Cryptocurrency Tax Provisions are Overbroad, Yet Untargeted
The new cryptocurrency provisions have rightly been criticized since they were proposed this summer.
The expanded definition of “broker” makes sense if Congress is targeting centralized cryptocurrency exchanges that function like traditional broker-dealers. The language in the law is so broad, however, that it includes people who are mining cryptocurrencies, or maintaining a decentralized finance platform. This has already resulted in pushing developers or miners to explore other jurisdictions,and could lead to stunted innovation within the cryptocurrency space.
Likewise, the definition of digital asset goes beyond cryptocurrency and could extend to other digital goods, such as NFTs, products which Congress did not initially target as part of the reforms, adding to the inefficiencies.
Lastly, the cash provisions create a level of additional reporting requirements for which many digital asset businesses don’t have the infrastructure, and some smaller actors may not be able to provide altogether. Additionally, conversion is a problem - $10,000 in cash is easy to identify, but when the value of cryptocurrency fluctuates on a daily basis it’s difficult to spot what fraction of a coin may hit that threshold. Lastly, the potential criminal consequences which could freeze a lot of otherwise healthy crypto behavior.
V. To Create a New Tax Regime, Look Back
Amending the language in these provisions to tighten definitions, as some congress members suggest, will not be enough to fix their issues. Congress should examine cryptocurrencies on a fundamental level to design a regime that best collects tax revenue without hampering innovation, rather than taking a piecemeal approach where certain aspects of cryptocurrency taxation are overbroad and other large vulnerabilities remain.
Luckily, this has been done before. With unique derivatives in the 1980s, regulators had to create a new approach to taxing financial products that don’t easily fit into pre-made taxation cubbyholes.
Using that derivatives framework, regulators can take multiple approaches. One path is a hybrid model to gradually implement rules while letting recordkeeping technology develop. This approach can provide an amnesty provision to allow cryptocurrency players to self-report transactions without repercussions, similar to the approach toward off-shore accounts. Changes to classifications of cryptocurrency could be subject to a de minimis exception, allowing tax collection without pushing out smaller players in the field. And lastly, to simplify reporting, some scholars have suggested using a moving average cost method for valuing gains and losses on transactions.
A more efficient tax regime could lead to increased investment in blockchain technology, increases in GDP growth, improved compliance and a broader use case for blockchain technology. The blueprint for taxing a unique financial instrument is there – Congress need only to look back and follow it now.
 Heather Long, Biden’s infrastructure bill will bring jobs. He wants the safety net bill to reduce inequalities, The Washington Post, (Nov. 7, 2021), https://www.washingtonpost.com/business/2021/11/07/biden-infrastructure-build-back-better-analysis/
 Infrastructure Investment and Jobs Act, H.R. 3684, 117th Cong. §806301(a) (2021).
 Id. at §806301(b)(1)(B).
 Id. at §806301(d)(B).
 Id. at §806301(b)(3); See also I.R.C. §6050I(b)(2)(A)
 Mary Katherine Brown, Crypto Crackdown Survives in Infrastructure Bill, Tax Notes, (Nov. 9, 2021), https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/crypto-crackdown-survives-infrastructure-bill/2021/11/09/7cl71
 I.R.S. Notice 2014-21, 2014-16 I.R.B. 938.
 Marie Sapirie, Interview, Breaking Down the Cryptocurrency Tax Proposals in Congress, Tax Notes, (Sept. 21, 2021), https://www.taxnotes.com/opinions/interview-breaking-down-cryptocurrency-tax-proposals-congress/2021/09/21/7856f.
 Cryptocurrency hard forks result when changes in the underlying blockchain software cause the blockchain to be split into two blocks, each applying unique transaction verifications. An example was Bitcoin forking into Bitcoin and Bitcoin Cash in 2017. An airdrop is essentially a distribution of a cryptocurrency, often newly developed and givne out for free. See Jones Day Talks: Hard Forks and Airdrops – The IRS Issues Cryptocurrency Tax Guidance, Jones Day (Feb. 2020) https://www.jonesday.com/en/insights/2020/02/hard-forks-and-airdrops
 I.R.S. Tech. Adv. Mem. 1031.00-00,1031.02-00 (June 8, 2021).
 Benjamin Guggenheim, I.R.S. Cracking Down on Crypto Noncompliance, Tax Notes, (Nov. 1, 2021), https://www.taxnotes.com/tax-notes-federal/audits/irs-cracking-down-crypto-noncompliance/2021/11/01/7cjpg.
 Megan L. Brackney & Jas Singh, John Doe Summonses, Cryptocurrency, and the Taxpayer First Act, Tax Notes, (Oct. 15, 2021), https://www.taxnotes.com/taxpractice/cryptocurrency/john-doe-summonses-cryptocurrency-and-taxpayer-first-act/2021/10/15/7bbzq.
 Leon LaBrecque, Crypto Tax: Charitable Contributions, Wash Sales, And New Tax Rules On The Horizon, Forbes, (Oct. 13, 2021), https://www.forbes.com/sites/leonlabrecque/2021/10/13/crypto-tax-charitable-contributions-wash-sales-and-new-tax-rules-on-the-horizon/?sh=311088c86175.
Robert W. Wood & Alex Brown, Considering Crypto Tax Myths, Tax Notes, (Nov. 4, 2021), https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/considering-cryptocurrency-tax-myths/2021/11/04/79h25.
 Sapirie, supra note 9
 Brown, supra note 7
 E.g., Coinbase, Robinhood; See Sapirie, supra note 9
 Miners may be lending computer power to validate transactions and receive cryptocurrency in exchange, and DeFi platforms execute transfers based on something that’s set in code, but without human intervention; See Sapirie, supra note 9
 Frederic Lee, Potential Breadth of Crypto Rules Worries Industry, Tax Notes, (Sept. 13, 2021), https://www.taxnotes.com/tax-notes-federal/cryptocurrency/potential-breadth-crypto-rules-worries-industry/2021/09/13/783j2.
 Brown, supra note 7.
 Sapirie, Supra note 9.
 Brown, supra note 7.
 Kristen A. Parillo, Ramp Up Crypto Reporting Now, Say Tax Pros, Tax Notes, (Aug. 30, 2021), https://www.taxnotes.com/tax-notes-federal/cryptocurrency/ramp-crypto-reporting-now-say-tax-pros/2021/08/30/777p2.
 See, e.g., Treas. Reg. 26 CFR Part 1, §1.446-3T
 Michael D. Chatham & Thomas K. Duncan, Taxation as a Barrier to Blockchain Innovation, Journal of Taxation of Investments 3, 11 (2020).
 Wood, supra note 15.
 Chatham, supra note 29, at 14.
 Id. at 15 – 19.