- Blockchain expert Dr. Merav Ozair believes the new Infrastructure Bill could damage the cryptocurrency industry and is built on misconceptions.
- New tax requirements don't take into account the way crypto differs from stock investments.
Rutgers Business School's Dr. Merav Ozair explains how the Infrastructure Bill could hurt crypto.
President Biden signed a new $1.2 trillion Infrastructure Investment and Jobs Act, also known as the Infrastructure Bill, into law at the end of last year. The legislation covers spending on all kinds of infrastructure, including water, electricity, internet, roads, rails, and airports. One of the ways the government hopes to finance all that work is by bolstering the amount of tax it receives from cryptocurrency and digital assets.
We spoke to Dr. Merav Ozair, a leading blockchain expert and FinTech professor at Rutgers Business School, to understand more about why people have labeled the new bill "anti-crypto" -- and whether they're right.
Crypto provisions based on misconceptions
Dr. Ozair says the bill deliberately tries to reduce cryptocurrency usage. "The hidden intent is that these excessive reporting requirements will act as an incentive to decrease the usage of cryptocurrencies," she said.
The professor argues the inclusion of cryptocurrency provisions in the bill stems from two misconceptions:
- The idea that cryptocurrency mining consumes a lot of energy and should be penalized.
- The idea that there's a lack of transparency in cryptocurrency that makes it susceptible to money laundering.
Here's why Dr. Ozair thinks the logic doesn't add up in either case. Firstly, she points out that not all blockchains are created equal in terms of energy consumption. There's a big difference between the proof-of-work model used by Bitcoin (BTC) and the newer proof-of-stake models used by many other cryptocurrencies.
"When people criticize the high energy consumption associated with cryptocurrency, they refer to the proof-of-work consensus mechanism and, in particular, as it relates to Bitcoin," she said. Even other proof-of-work cryptos like Ethereum (ETH) don't consume as much energy as Bitcoin. She also argues that Bitcoin mining could be powered by green energy such as wind or solar, which she says may increase the efficiency of these facilities.
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The second issue is that new law also requires any transaction involving more than $10,000 worth of crypto to be declared to the IRS. For example, if you wanted to buy something using $15,000 of Bitcoin, the merchant would have to report the sale along with your personal information. Currently, this is only the case for cash and cash equivalents, with a view to combating money laundering.
Dr. Ozair is at pains to point out that cryptocurrency transactions should not be viewed as cash equivalents. "Cryptocurrency transactions are fully transparent and are traceable and trackable, by design, unlike cash transactions," she said. The expert in blockchain argues this traceability has helped the FBI capture criminals and terrorists using cryptocurrencies, which wouldn't be possible with cash.
How the Infrastructure Bill will impact crypto investors
The first thing investors should know is that the new requirements won't come into effect until January 2024. The crypto industry is lobbying for clarification on certain aspects of the law before that date, but so far no amendments have been passed.
As it stands, there are tax and privacy implications for crypto investors. Tax-wise, the government wants to tighten up its crypto tax collection -- but the way it proposes to do this has come under fire from many in the industry, including Dr. Ozair.
The 1099-B form
Right now, crypto investors are required to declare any cryptocurrency gains to the IRS as they would with other investment gains. The big change with the Infrastructure Bill is that crypto brokers would have to report crypto transactions directly to the IRS using something called a 1099-B form. But it doesn't factor in the way people use external crypto wallets and decentralized finance services.
"Brokers and crypto exchanges will have to issue a 1099-B form to both the IRS and their customers -- similar to the way brokers report transactions of financial instruments, traded on traditional exchanges," said Dr. Ozair.
The 1099-B form is essentially an automatic matching system that has worked effectively for stock investments. A stock broker has to send both the IRS and the customer a 1099-B form detailing a customer's gains. If the customer doesn't declare those gains, the IRS will notify them that there's a discrepancy. But, as Dr. Ozair explains, people don't use cryptocurrencies in the same way as stocks.
"If a person has both self-custody wallet and a centralized crypto exchange wallet, then that might be a bit 'tricky,' as the broker or centralized crypto exchange can only report the holdings and transactions on centralized crypto exchanges, such as Coinbase or Gemini, but not on decentralized exchanges," she said.
Let's say you bought 3 ETH for about $4,500 a year ago and put it in a private crypto wallet. It's now worth about $8,400. You move it to Gemini and sell it, which is a taxable event. You should owe taxes on the gains of $3,900. But because Gemini wouldn't know when you bought that Ethereum or what you paid for it, it can only tell the IRS about the sale, so the IRS would think you owed tax on the whole $8,400.
What can be done?
Dr. Ozair stresses the importance of both education and participation. "Policymakers and legislators should be educated on these issues and better understand and appreciate the benefits that blockchain has to offer to better our society and the economy," she said. One way to do this would be to create a sandbox -- a type of safe testing environment -- involving businesses, developers, legislators, and regulators. That way, legislators could see for themselves how this technology works and how compliance could be built into different applications.
She believes if nothing is done, the bill could have "unintended consequences" for the whole industry. Not only does she think it could drive crypto transactions toward unregulated services and private wallets, but she also thinks it would damage overall adoption of blockchain technology and cryptocurrency.
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Emma Newbery owns Bitcoin and Ethereum.
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