The Keep Innovation In America Act aims to ease the compliance burden on crypto brokers
Rep. Tom Emmer tries to narrow the definition of crypto broker again. (Photo by Chip Somodevilla/Getty Images)
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What happened
The Infrastructure Act passed by the US Congress in 2021 defined cryptocurrency exchanges as brokers and subject to the burdensome tax reporting rules.
The legal definition of a broker has been a controversial topic ever since. Critics argue that the current definition could include not only cryptocurrency exchanges, but also miners, validators, hardware manufacturers and software providers. Individuals or organizations deemed to be brokers must comply with onerous Internal Revenue Service (IRS) rules such as issuing 1099 tax forms to clients and reporting asset transfers between other brokers.
Following these complicated rules is not practical for entities other than commercial exchanges. In addition, regulations (often referred to as Regs) to further clarify the broker definition have been out for several months, which has left stakeholders anxious. This unfriendly and uncertain regulatory environment may hinder the development of digital assets in the United States and may move innovation out of the country in the long term.
The Keep Innovation in America Act (KIAA), originally proposed in 2021, was reintroduced on March 7. The aim is to create a friendly regulatory environment for crypto by easing the existing laws related to brokers.
Key concepts
KIAA proposes the following updates to the Act mandated by the Infrastructure Act adopted in 2021.
Broker Definition
First, the new bill will update the definition of a broker from “any person who (for a fee) is responsible for regularly providing any service that effectuates transfers of digital assets on behalf of another person” to “any person who (for a fee ) is ready in the ordinary course of a trade or business to carry out the sale of digital assets according to the customer’s instructions.”
The updated definition is limited in scope, apparently only capturing commercial cryptocurrency exchanges that execute trades in response to customer requests.
Definition of digital assets
Similarly, the proposed Act would update the definition of digital asset from “Unless otherwise provided by the Secretary, the term ‘digital asset’ means any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology as specified by the Secretary” to ” The term “digital asset” means any digital representation of value recorded on a cryptographically secured distributed ledger.”
The updated definition has again narrowed its scope” by eliminating broad phrases such as “any digital representation of value” and “any similar technology as specified by the Secretary of the Treasury.”
Transfer reporting
The infrastructure bill mandated that brokers capture wallet addresses (and potentially other information prescribed by the pending rules) when customers transfer assets from a broker to a non-broker location, such as their own wallets or a decentralized financial platform.
The new bill requires the broker to report this data to the authorities only if the customer provides this information voluntarily. The new rule is clearly a good step towards securing the privacy of cryptocurrency users.
Digital assets such as cash
When a company accepts money beyond $10,000 in a transaction, it is necessary to file a Form 8300 disclosing the parties involved. While this type of reporting has historically been limited to pure cash transactions, the infrastructure bill expanded the requirement to include digital assets that — ironically — are treated as non-cash property by the IRS in general. Apart from this inconsistent tax classification, in many situations it may not be practical to enforce these reporting rules in the crypto world, especially when the counterparty uses a pseudonym. This could have a negative impact on crypto adoption among businesses as a payment method.
The KIAA requires the Treasury to conduct a study with industry stakeholders on “expanding the definition of cash to include any digital asset” within 365 days of adoption. Findings of the study have the potential to update the existing rules to the benefit of the industry.
Delayed effective date
The proposed draft would push the effective date of the brokerage rules from to December 31, 2025, from the end of this year. This is another industry-friendly move because it gives brokers time to get ready for compliance.
