Crypto Lobbyists Falter in Bid to Fix Broad Tax Provision
Cryptocurrency lobbyists were caught ill-equipped in one of the first legislative battles for their nascent industry, despite a Herculean push that impressed Washington insiders with its intensity.
The industry failed to win a change to crypto tax reporting rules in the infrastructure bill, leaving intact language for broad oversight of virtual currencies in the legislation that passed the Senate on Tuesday.
The amendment, with sponsors including Wyoming Republican Cynthia Lummis and Virginia Democrat Mark Warner, would have walked back new tax reporting requirements for crypto firms. It was designed to address concerns from the cryptocurrency industry that the bill would require entities -- like miners and software developers -- to report tax data to the Internal Revenue Service that they didn’t have access to.
The requirements, projected to raise about $28 billion in revenue, had been included as part of the Senate’s $550 billion infrastructure package.
In the end, the crypto industry’s lobbying, public outreach and even tweeted prayers weren’t enough. The last-minute amendment required unanimous consent on Monday -- which means support from all 100 senators -- and when Alabama Republican Richard Shelby objected, the fight was lost, at least for now.
While industries like banking, housing and pharmaceuticals have longstanding ties to lawmakers and lobbying operations sometimes backed by eight-figure bankrolls, the cryptocurrency industry is just making itself known in the halls of Congress for the most part. Bitcoin, for example, has fervent enthusiasts, but it has existed only since 2009, and many voters still don’t know much about it. Unlike other industries -- where there’s a bank, real-estate agent and pharmacy in every district -- lawmakers can’t always point to a constituent who supports cryptocurrency.
“What the industry was able to do once it was up against the ropes was impressive, but from a tactical perspective the goal is to avoid getting pinned against the ropes altogether,” said Isaac Boltansky, a policy analyst with investment firm Compass Point Research & Trading.
Crypto advocates say the Senate defeat shows the need for more organization and money as the burgeoning industry increasingly catches policy makers’ attention.
At issue was a so-called pay-for included in the Senate’s infrastructure package that Congress’s official tax scorekeeper said would raise the $28 billion over the next decade. The provision would require some cryptocurrency companies that provide a service “effectuating” the transfer of digital assets to report information on their users, as some other financial firms are required to do, in an effort to enforce tax compliance.
Crypto supporters said the provision’s wording would seemingly apply to companies that have no ability to collect data on users, such as cryptocurrency miners, and could push a swath of the industry overseas.
The provision caught lobbyists by surprise and spurred a heated grassroots effort. Fight for the Future, a nonprofit digital advocacy group, created a website that it said helped coordinate tens of thousands of calls to lawmakers. Senior crypto executives, such as Square Inc. Chief Executive Officer Jack Dorsey and Coinbase Global Inc. CEO Brian Armstrong, tweeted in support of changing the provision. When it became apparent that the only road to victory was a unanimous consent vote, crypto lobbyists tried to coordinate to gather intelligence from all 100 Senate offices to ensure that no lawmaker would object.
“We’ve known for a long time that we are under-resourced and understaffed,” said Blockchain Association executive director Kristin Smith, who said her advocacy group last year had a budget that was about 1% of that of the American Bankers Association. “What the crypto industry has woken up to is that they need to invest in Washington.”
In the second quarter, the Blockchain Association spent $160,000 on lobbying, according to its congressional disclosures. Coinbase, the exchange, spent $80,000. That compares with the $2.5 million the ABA said it spent on lobbying in the same period.
After the Senate passed the infrastructure bill on Tuesday, crypto advocates will have another chance to change the provision when the House of Representatives takes the bill up in September, but they could face an uphill climb due to procedural issues.
Then the lobbying battle will move to the IRS as it writes rules to implement the law, a process that could take years. Some lawmakers have said that they don’t interpret the crypto provision to encompass as many companies as the industry fears.
The loss wasn’t a total failure for the crypto industry. Were it not for arcane rules of Senate procedure and a limited time span in which to fight, industry executives very well might have succeeded. They also found unexpected allies, such as Senate Finance Committee Chairman Ron Wyden, a progressive who has authored a wide array of tax proposals to increase levies on corporations and wealthy Americans.
The Oregon Democrat, whose committee has jurisdiction over tax issues, argued that crypto entities and investors needed fewer reporting rules than were included in the original bill -- not more -- an argument that’s in stark contrast to many of his other proposals that would give the IRS access to more taxpayer data.
On Tuesday, Wyden called the crypto provision being sent to the House a “badly flawed proposal” and said he’d work with the House to change it. Members of the Congressional Blockchain Caucus on Monday sent a letter to other House members encouraging them to change the provision.
Wyden has repeatedly said that his less strict approach would still prevent people from using crypto to evade taxes and launder money. But Wyden ultimately said he couldn’t agree to a bipartisan compromise amendment that five other senators supported. He said in a tweet that the deal “is certainly better than the underlying bill,” but that he doesn’t believe that the language goes far enough to “protect privacy and security.”
Wyden could prove to be a valuable ally for the crypto community as Washington increasingly looks to regulate and tax the emerging technology.
The silver lining is that “we found out who in the Senate is interested in this subject who maybe previously didn’t know anything about it,” Senator Lummis, who co-founded the Financial Innovation Caucus, told reporters Monday.
Some crypto lobbyists said they must amp up their efforts to avoid similar pitfalls in the future.
“This past week’s fire drill is directly related to the industry’s failure to be fully plugged in to the public policy process,” said Michelle Bond, CEO of the Washington-based Association for Digital Asset Markets, a self-governing association. Bond called the grassroots efforts “nothing short of spectacular” but said the industry needs to better collect intelligence to catch similar provisions earlier in the process.
Smith of the Blockchain Association said her trade group will try to use the firestorm over the crypto provision to get more lawmakers engaged on their industry’s issues.
“You’ll see in the months ahead a tremendous amount of money come into this space,” Smith said. “Hopefully next time we won’t find ourselves in a last-minute scramble.”
©2021 Bloomberg L.P.