Treasury Secretary Janet L. Yellen spoke with lawmakers Thursday to raise objections to the effort led by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and two Republican senators to weaken the legislation’s proposed cryptocurrency overhauls, according to two people who spoke on the condition of anonymity to share details of private conversations. Yellen lobbied Wyden about the matter, the people said.
Last month, the White House and Sen. Rob Portman (R-Ohio) agreed to a proposal to require increased tax compliance for cryptocurrency brokers as a way to help pay for the bipartisan infrastructure bill. The deal came under intense criticism from cryptocurrency investors, who have argued it would give the Biden administration sweeping powers to virtually cripple the growing field of cryptocurrencies.
It was also rebuked by Wyden, Sen. Patrick J. Toomey (R-Pa.), and Sen. Cynthia M. Lummis (R-Wyo.), who are pushing an amendment to the infrastructure bill intended to prevent the Biden administration from applying the new rules to a wide swath of actors in the cryptocurrency ecosystem.
Some senators had hoped to pass the bipartisan bill on Thursday night, but the debate bogged down and the cryptocurrency fight remained one of the unresolved issues.
On Thursday night, as the impasse between Wyden and the White House appeared to deepen, Portman and Sen. Mark R. Warner (D-Va.) offered a competing amendment as a potential compromise. The Warner-Portman measure would exempt more cryptocurrency actors from greater regulation than the initial proposal, but fewer than Wyden, Toomey and Lummis want. The White House said publicly late Thursday it is supporting the Portman-Warner effort, as it would do less to limit the executive branch’s new authorities over cryptocurrencies.
A Treasury spokeswoman declined to comment on Yellen’s private conversations.
“We are grateful to Chairman Wyden for his leadership in pushing the Senate to address this issue. However, we believe that the alternative amendment put forward by Senators Warner, Portman, and Sinema strikes the right balance and makes an important step forward in promoting tax compliance,” White House spokesperson Andrew Bates said in a statement provided to The Washington Post, noting the work of Sen. Kyrsten Sinema (D-Ariz.).
The issue has divided senators during the final dash to finish crafting a $1 trillion bipartisan infrastructural proposal, and it has the potential to imperil already tenuous support among lawmakers for the bipartisan infrastructure package.
The episode also reflects the extent to which cryptocurrencies — which have emerged as a trillion-dollar industry from obscurity less than a decade ago — have begun to upend politics in Washington.
The Senate is adjourned until Saturday, when lawmakers will try to reach a compromise and pass the infrastructure bill.
The initial plan that set off the controversy, crafted by Portman with the help of Treasury Department officials, is aimed at increasing tax compliance in the purposefully opaque cryptocurrency sector. Estimates have found it would raise roughly $28 billion over 10 years — funding that is crucial for paying for the broader infrastructure package.
The proposed cryptocurrency changes consist of two key parts. One would include digital assets such as crypto in requirements to report payments worth more than $10,000 to the Internal Revenue Service. That idea has generated little controversy.
The second part would clarify the definition of a broker for players in the cryptocurrency market, which would require them to file a type of 1099 form for transactions on certain kinds of digital assets.
Cryptocurrency industry groups are largely open to extending 1099 reporting requirements to established crypto trading brokers, such as Coinbase, a publicly traded exchange platform for cryptocurrencies. But they have alleged that the legislation as written would also give the Biden administration authority to require the same of bitcoin “miners” who are crucial for validating transactions on the decentralized network, as well as software developers and others. Industry groups have warned that software developers and miners do not have the capacity to send 1099s to the IRS, because intrinsic to cryptocurrencies’ function is that these kinds of producers have no knowledge of who their users are.
Coinbase CEO Brian Armstrong wrote on Twitter that “issuing more 1099s is a great idea” and that Coinbase is happy to do so. But, he added, the bill’s definition of brokers would appear to include miners and developers which “makes no sense” and could drive it outside of the United States.
Portman’s office has insisted the legislation is not intended to grant federal officials the authority to increase tax-reporting requirements for developers and miners. Not satisfied with that explanation, and to bind the administration’s hands, Wyden, Toomey, and Lummis offered an amendment to specify in the law that “nothing in this section … shall be construed to create any inference” that it applies to miners or private developers.
As the impasse appeared to threaten the broader infrastructure package, Warner and Portman proposed late Thursday night a new compromise measure. That compromise would prevent the new reporting requirements from applying to either traditional brokerages or a specific kind of cryptocurrency miner — the “proof of work” miner.
Cryptocurrencies like bitcoin are produced — or “mined” — in different ways. The most established form of cryptocurrency comes from “proof of work,” which requires users to solve a mathematical equation to validate transactions. Bitcoin, the best-known form of cryptocurrency, depends on “proof of work” mining. But other forms of cryptocurrency, including potential emerging rivals to bitcoin, are pursuing other methods of validating transactions on the decentralized network, and could prove less energy-intensive. Since these would be subject to the new reporting requirements under the Warner plan, even though the traditional forms of mining would not be, Wyden late Thursday bashed the competing amendment as “government-sanctioned safe harbor for the most climate-damaging form of crypto tech.” Other experts dispute that, however.
“The Warner amendment puts a heavy thumb on the scale in favor of a more energy-intensive method of validating cryptocurrency transactions. It is surprising that a climate-conscious administration would endorse that,” said Daniel Hemel, a law professor at the University of Chicago and tax expert.
Jason Furman, a former Obama administration economist, said it is important for Treasury to have “the flexibility” to regulate cryptocurrency players who try to evade taxes on the increases in the value of their coins, particularly given the potential for future and unforeseen innovations in the sector.
“If the technology makes it impossible to know people’s capital gains, then the technology should not exist,” Furman said. “It cannot just be the exchanges. You have to know from beginning to end how much someone paid for the coin, how much someone sold the coin for, and be able to match those two up.”
The fracas on Capitol Hill portends the bitter fight looming as the federal government considers how to further regulate cryptocurrencies. Yellen has previously warned of the dangers she believes bitcoin poses.
“To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering,” Yellen said earlier this year.
This week, Securities and Exchange Commission Chairman Gary Gensler made clear his desire to regulate digital currencies at the Aspen Security Forum and called for “additional congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks.”