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America's Crypto Dilemma
Cryptocurrencies came under pressure this autumn when Congress saw the fledgling business as a way to earn tax money. Congress had all it needed to say it had secured $28 billion in projected tax income over the next 10 years in just a few short pages and two modifications to the Internal Revenue Code. Is it true, though, that taxing cryptocurrencies will bring $28 billion to the government's budget?
The data and procedures utilized are normally kept classified and not shared with the public, according to a representative for the Joint Committee on Taxation (JCT), the organization that generates these estimates. However, it may be useful to explore some of the more unusual issues they may have encountered in creating the estimate––particularly as legislators work on amending the legislation.
Taxing What Doesn’t Exist
The most intriguing aspect of the Infrastructure Investment and Jobs Act's cryptocurrency provision is the assumption that it would enhance tax revenue while also imposing a de facto prohibition on some of the lawful activity it aims to tax. To be honest, the law is unlikely to put an end to all cryptocurrency activity in the United States. Traditional brokers, such as Coinbase and Robinhood, already have the majority of the information needed to comply with the rule. However, since these brokers currently submit information to the IRS and send tax paperwork to consumers as part of their existing monitoring, it's unlikely that the provision would generate new money.
The requirement that bitcoin miners and software developers disclose information to the IRS is one area where the law might generate more income. However, because the legislation demands an unattainable reporting requirement, that is precisely what the law would likely remove.
Members of the bitcoin business have proved in the past that they will not hesitate to vote with their feet. In protest to the state's intrusive BitLicense, Kraken, Paxful, Bitfinex, BitQuick, BTCGuild, Eobot, Genesis Mining, GoCoin, LocalBitcoins, and Poloniex all departed New York in 2015. The BitLicense "comes at a price that surpasses the market potential of supplying New York people," Kraken stated in a blog post at the time. As a result, we have no choice except to leave the state's service."
If the Infrastructure Act is left unamended, there is little doubt that much of the industry will be left with no option but to withdraw their services from the nation as a whole. In fact, that is exactly what happened earlier this year when the Chinese government cracked down on cryptocurrencies. The Chinese government declared both cryptocurrency transactions and cryptocurrency mining illegal. In the months that followed, “fourteen of the biggest crypto mining companies in the world [moved] more than 2 million machines out of China,” according to the Financial Times (See Figure 1 below for where some of those machines were sent).
Asking Too Much?
Although the JCT was unable to comment on their methodology, it should not be unreasonable to expect the industry's response. In reality, the JCT has said that its models take into account how taxpayer behavior may alter in the future. This includes taking into account "changes in the legal form of conducting business" as well as "whether some taxpayers may find it easier to comply with its obligations than others." Both considerations should have caught the predicted departure, but the source of the anticipated tax income remains a mystery.
Predicting the future is not an exact science, but scientific approaches can help improve it. The spirit of transparency and citation is at the top of the list. Something is definitely wrong if a measure can become law without any public debate and one of its main selling points is an unsupported assertion.
Legislators should not, however, let the difficulty of dealing with the $28 billion projection derail the discussion. Whether they try to write an amendment that maintains the estimate intact or one that entirely ignores it, one thing is clear: a single, unaudited estimate should not be the determining factor in any policy––especially when it leaves so many concerns unresolved.
