By Mark S. Nelson, J.D.
The Senate passed the Infrastructure Investment and Jobs Act (H.R. 3684) by a vote of 69-30, a significant bipartisan achievement with a somewhat less clear path forward in the House, which has seemingly tied the bill’s passage to a related, Democrat-only reconciliation bill. Section 80603 of the Infrastructure Investment and Jobs Act contains a transaction reporting requirement that would apply broadly to the cryptocurrency industry. Despite several attempts in the last week to pass a limiting amendment, Senators failed to vote on any of the proposed amendments following a late attempt by a Republican senator to link a defense department amendment to a version of the transaction reporting amendment that had the backing of the Biden Administration and a bipartisan group of senators. The infrastructure bill now moves to the House which, in theory, could amend the bill and return it to the Senate, but Senate Democrats have already begun work on the related reconciliation bill.
The following timeline tracks the cryptocurrency transaction reporting provision and the several attempts to amend the provision beginning with the public release of the underlying infrastructure bill text through the last-ditch attempt by Senators to vote on the latest version of an amendment to limit the reach of the transaction reporting requirement.
August 1, 2021—Bipartisan infrastructure bill announced. Senators Rob Portman (R-Ohio) and Kyrsten Sinema (D-Ariz), the sponsors of the bipartisan infrastructure bill, jointly announced the final bill text after months of negotiations by a group of ten Republican and Democrat senators. "Over the last four days we have worked day and night to finalize historic legislation that will invest in our nation’s hard infrastructure and create good-paying jobs for working Americans in communities across the country without raising taxes," said a press release. "This bipartisan bill and our shared commitment to see it across the finish line is further proof that the Senate can work."
Section 80603 of the Infrastructure Investment and Jobs Act would require transaction reporting under the Internal Revenue Code by persons and entities in the cryptocurrency industry. The provision would apply to "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."
Although it is unclear from the legislative history what current statutory text may have served as the model for Section 80603—the Internal Revenue Code has similar language—the provision nevertheless should sound familiar to securities practitioners. Section 202(a)(11) of the Investment Advisers Act defines who is considered to be an investment adviser thus: "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities" (emphasis added).
Of course, the Investment Advisers Act then goes on to list numerous persons and entities that would not be investment advisers, but Section 80603 does not contain such limiting language. As a result, several proposed amendments would take shape around providing some limits to the potentially broad reach of Section 80603.
August 2, 2021—Crypto amendment takes shape. One day after the infrastructure bill text was published, Sen. Pat Toomey (R-Pa), Ranking Member of the Senate Banking, Housing, and Urban Affairs Committee, voiced objections to the breadth of the transaction reporting requirement contained in Section 80603, thus beginning an effort to craft an amendment to limit the provision’s scope.
Said Sen. Toomey via press release: "Congress should not rush forward with this hastily-designed tax reporting regime for cryptocurrency, especially without a full understanding of the consequences. By including an overly broad definition of broker, the current provision sweeps in non-financial intermediaries like miners, network validators, and other service providers. Moreover, these individuals never take control of a consumer’s assets and don’t even have the personal-identifying information needed to file a 1099 with the IRS. Simply put, the text is unworkable. I plan to offer an amendment to fix it."
August 4, 2021—Wyden-Toomey-Lummis-Amendment. Senators Ron Wyden (D-Ore), Chair of the Senate Finance Committee, Toomey, and Cynthia Lummis (R-Wyo) formally introduced their limiting amendment.
The amendment would clarify that Section 80603 does not "include[] any person solely engaged in the business of—(A) validating distributed ledger transactions, (B) selling hardware or software for which the sole function is to permit a person to control private keys which are used for accessing digital assets on a distributed ledger, or (C) developing digital assets or their corresponding protocols for use by other persons, provided that such other persons are not customers of the person developing such assets or protocols."
Senator Toomey explained the amendment in a joint press release in terms nearly identical to his August 2, 2021 press release announcing his intent to offer a limiting amendment. Senator Lummis added that in her view "[d]igital assets are here to stay." She went on to explain: "The digital asset and financial technology space is incredibly complicated, and we have spent long hours working in the Senate, with industry stakeholders, and with the administration to find a way to effectively integrate digital assets into our tax code without harming the technology or stifling innovation." The same press release also quoted Sen. Wyden as stating: "This [amendment] will protect American innovation while at the same time ensuring those who buy and sell cryptocurrency pay the taxes they already owe."
August 5, 2021—Wyden-Toomey-Lummis-Amendment on the floor. The Wyden-Toomey-Lummis amendment moved to the Senate floor where all three Senators repeated arguments made previously via press releases, while a few of them offered a more expansive view of where the U.S. should be headed regarding blockchain technology.
Senator Toomey worried about original bill text having a "chilling effect" on the blockchain industry. "This provision scores as a source of revenue because it increases the likelihood of compliance," said Sen. Toomey. He also noted that Section 80603 was not the product of regular order (e.g., committee hearings and markup) but that the intent of the limiting amendment is to get the scope of Section 80603 correct even if later blockchain innovations require Congress to revisit the subject in the future.
And for Sen. Toomey, it is the underlying technology that holds the most promise. Said Sen. Toomey: "And while sometimes we think of this as some kind of unit of value that is traded and has some pretty spectacular volatility sometimes, for me, while that is very interesting, what is much more interesting is the underlying technology and what that might make possible" (Congressional Record, August 5, 2021 at S5912-S5914).
Senator Wyden added: "So two sentences about what we do in our amendment: We want it stated the tax enforcement rules should focus on the companies that deal with buying, selling, and trading cryptocurrencies. These rules don’t need to sweep up other uses of blockchain technologies that have nothing to do with tax avoidance" (Congressional Record, August 5, 2021 at S5913).
Senator Lummis expressed support for the "spirit" of Section 80603 while also reiterating her support for the limiting amendment. "We must make sure that the validators of distributed ledger assets— like miners and stakers, hardware wallet providers, and software developers—are not in a position to report transaction data to the Internal Revenue Service," said Sen. Lummis. She also observed that other countries were ahead of the U.S., especially in developing digital reserve currencies, and she suggested that now was a time when the U.S. has "window to catch up" because the U.S. Dollar is still the world’s reserve currency (Congressional Record , August 5, 2021, at S5922).
August 6, 2021 to August 8, 2021. On August 7, 2021, the Senate agreed to invoke cloture on Sen. Sinema’s substitute amendment that contained the text of the bipartisan infrastructure bill. During this three-day period, the Senate largely did not make significant additional progress, although a few Senators spoke about the cryptocurrency provision.
As one example, Sen. Hagerty (R-Tenn) objected to the use of the blockchain industry to help pay for the underlying infrastructure bill. Said Sen. Hagerty: "We are using the cryptocurrency market as a pay-for. Have we fully vetted how this new regulation and taxation will affect this rapidly developing industry? Will we wind up ceding this industry to others because of this regulation? What is the point of even having committees in the Senate with expertise in certain matters if the most significant legislation that passes this body doesn’t even go through?" Senator Hagerty also was one of several Republican Senators who sought to delay a final vote on the bill, which many had expected to occur on Saturday, August 7, 2021 (See Congressional Record , August 7, 2021, at S6002-S6004).
Senator Lee (R-Utah) also said he viewed the cryptocurrency provision, like other of the infrastructure provisions, as government acting like "Big Brother" to intrude on Americans’ privacy. With respect to blockchain, Lee stated: "This is very different than securities. These aren’t just stocks. It is something very different. It is a medium of exchange that, if adopted more widely, could facilitate a lot of economic activity and a lot of innovation within the United States of America. If, in fact, we pass this bill, mark my words, it is going to have a chilling effect on innovation within this sector" (See Congressional Record, August 7, 2021, at S6006-S6007).
On Sunday, August 8, 2021, the Senate agreed to the Sinema substitute amendment to the original House infrastructure bill. Majority Leader Chuck Schumer reiterated his willingness to take up amendments. "I would repeat that Democrats are ready and willing to vote on additional amendments to the bill before moving to final passage. Once again, that will require the cooperation of our Republican colleagues. I hope they will cooperate so we can move more quickly. Otherwise, we will proceed by the book and finish the bill," said Sen. Schumer (See Congressional Record , August 8, 2021, at S6031).
Senator Portman returned to the floor in support of the limiting amendment regarding Section 80603. "In particular, we want to be sure miners and stakers and others, now or in the future, who play a key role by validating transactions, or sellers of hardware or software for digital wallets, or node operators, or others who are not brokers are clearly exempted." Senator Portman later said: "While it is not the intent of the underlying bill to include them, I believe we can do more to make this clear, which is why I will continue to work with colleagues to clarify the intent of the information reporting language." To that end, Sen. Portman announced that he was working on a new amendment along with Sens. Mark Warner (D-Va), Toomey, Lummis, Jon Ossoff (D-Ga), and Sinema (See Congressional Record, August 8, 2021, at S6042).
As for amendments, the procedural wrangling continued, as exemplified by a colloquy between Sens. Hagerty and Sinema. Senator Hagerty had asked for unanimous consent to consider amendments, including the Wyden-Toomey-Lummis amendment to Section 80603. Senator Sinema noted the lack of unanimous consent on amendments and on a post-cloture timing agreement so she asked to continue under regular order. Senator Hagerty concluded after Sen. Sinema’s remarks: "I have never objected to considering amendments on this bill—not once. Democrats say they want amendments, but they can’t take yes for an answer. The Democrats’ true intention is to rush this bill through so that they can hurry up and light the fuse on their $3.5 trillion spending spree—a socialist debt bomb—and then leave town for vacation" (See Congressional Record, August 8, 2021, at S6043-S6044).
August 9, 2021—renewed hope for an amendment dashed. Senator Toomey announced via press release and on the Senate floor a new amendment that was the product of discussions between the Senators mentioned by Sen. Portman the day before. According to Sen. Toomey: "Our solution just makes clear that a broker means only those persons who conduct transactions on exchanges where customers are buying and selling and trading digital assets." Senator Toomey added: "We make sure that the bill does not sweep in software developers. It does not sweep in crypto transaction validators, regardless of which of the various methods they use for the validation. It doesn’t sweep in node operators or any other nonbrokers. But anyone who owes any tax from a cryptocurrency transaction should pay their tax obligation" (See Congressional Record , August 9, 2021, at S6083).
Specifically, the amendment would replace the text "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person" with "any person who (for consideration) regularly effectuates transfers of digital assets on behalf of another person." The new language is more akin to Exchange Act Section 3(a)(4)’s definition of "broker," which applies to "any person engaged in the business of effecting transactions in securities for the account of others" (See Congressional Record, August 9, 2021, at S6131-S6132).
In a colloquy between Sen. Warner and Sen. Portman, Sen. Warner confirmed that the new amendment would not include "persons solely engaged in the business of validating distributed ledger transactions through proof of work, often called miners" nor would it include "persons solely engaged in the business of selling hardware or software that allows people to access their private keys." With respect to the first set of persons excluded from the definition of "broker" by the amendment, Sen. Warner said that Treasury had indicated that stakers also would be excluded (See Congressional Record, August 9, 2021, at S6095-S6096).
Senator Lummis also expressed support for the new amendment. She reiterated much of what Sen. Toomey had said but added the following regarding software developers: "Equally important in this amendment are clarifications to the definition of ‘broker’ that will ensure that software protocol developers will not be swept up in IRS reporting requirements. Developers are the lifeblood of innovation and subjecting them to reporting would have far-reaching implications on privacy and on the evolution of technology in this country, not to mention that most developers would not have access to useful data" (See Congressional Record, August 9, 2021, at S6083).
And that was when the new amendment’s prospects began to unravel. Senator Ted Cruz (R-Texas) said he hoped the new amendment would be adopted while suggesting a more drastic remedy if it failed. Said Sen. Cruz: "The right outcome, I think, is an amendment I introduced—strike the whole damn thing. If we want to legislate on this, actually do our jobs, be a deliberative body, hold hearings, listen to witnesses, understand the consequences." The senator had questioned the lack of committee hearings and whether any Senators actually understood how cryptocurrencies work (See Congressional Record, August 9, 2021, at S6084).
Next, Senator Richard Shelby (R-Ala), a former Chair of the Senate Banking, Housing, and Urban Affairs Committee, asked that Sen. Toomey accede to including a $50 billion Department of Defense infrastructure provision along with the cryptocurrency amendment, which Sen. Toomey agreed to do. At that point, Sen. Bernie Sanders (I-Vt), Chair of the Senate Budget Committee, objected to the Shelby amendment. "So I would say to my friend from Alabama, if we are going to invest $50 billion, let us, in fact, invest in transforming our energy system so that we can save this planet for future generations and prevent the kind of unhealthy deterioration that we will inevitably see if we do not act," said Sen. Sanders.
Senator Tom Carper (D-Del) then asked for unanimous consent to take up the new amendment offered by Sen. Toomey. Senator Shelby again asked that his DoD amendment be included and Sen. Carper refused, effectively killing the cryptocurrency amendment in order to prevent a vote on the Shelby amendment.
Senator Toomey explained the result thus: "Because there is a difference of opinion on whether or not the Senator from Alabama should get a vote on his amendment—because that is not agreed to—the body is refusing to take up an amendment that has broad bipartisan support that we all know fixes something that badly needs to be fixed."
Senator Toomey then repeated the many unintended consequences for the cryptocurrency industry that may flow from the original text of Section 80603, which would soon be passed by the Senate as part of the larger bipartisan infrastructure bill. He explained it at length thus:
"This is what is going to get sent ultimately to the President’s desk. It is a transaction reporting requirement, including name, taxpayer ID number, dollar amount, date. It is imposed on any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."
"Well, look, I am not even a lawyer, but I can read. It sounds to me like any service effectuating transfers—that would include validators. I don’t know how that doesn’t include miners, stakers. It probably includes hardware and software wallets, software developers all across any kind of platform. We are going to ask these people to provide information that they don’t have and they can’t get."
"In what universe does that make any sense at all? All I want to do is have a vote on an amendment that fixes this in a way that has bipartisan agreement, in a way that constrains this to apply narrowly to the people who actually are the intermediaries running a centralized exchange, who have this information. But apparently we are not going to be able to do that. So we will be back on this because we are going to do a lot of damage."
August 10, 2021—Senate passes infrastructure bill. The Senate reconvened this morning and, almost anti-climatically, passed the Infrastructure Investment and Jobs Act by a vote of 69-30. The bill now goes to the House, where it has a complicated relationship to the upcoming Democrat-only reconciliation bill, which had its kick-off in Senate moments after passage of the bipartisan Infrastructure Investment and Jobs Act.
It is at least conceivable that the House could tack on amendments and then return the bill to the Senate, but that could jeopardize some of the bipartisanship that produced the Infrastructure Investment and Jobs Act in the first place. It is also possible that, if the Infrastructure Investment and Jobs Act becomes law in its current form, the Treasury Department could issue an interpretation or other guidance on its application as happened regarding S corporations following enactment of the Tax Cuts and Jobs Act in 2017. But a longer-term solution to the original text of Section 80603 likely will require Congress to eventually revisit the provision.
The question of what is next also could mean the consideration of additional legal definitions for the blockchain industry. Part of the discussion could be a comprehensive bill recently introduced by Rep. Don Beyer (D-Va).