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Infrastructure Deal Puts Cryptocurrencies in Washington’s Cross Hairs

A provision in the Senate legislation would give the I.R.S. more power to scrutinize a largely unregulated corner of finance.

WASHINGTON — In a hunt for funds to help pay for the Senate’s bipartisan infrastructure package, lawmakers have turned to the cryptocurrency industry as a potential source of tax revenue and are proposing tougher scrutiny of digital transactions.

A provision of the package would require cryptocurrency brokers and investors to provide more disclosure about their transactions to the Internal Revenue Service. The aim is to bring more transparency to an opaque sector, which critics argue is a haven for money laundering and tax evasion. But the provision also underscores the realization in Washington that the $2 trillion industry is here to stay and offers a new opportunity to generate federal tax revenue.

By strengthening tax enforcement on such digital assets, the federal government could raise $28 billion over a decade, according to an estimate by the Joint Committee on Taxation, which analyzed the plan. While that would be just a small fraction of the $550 billion that lawmakers have proposed in new federal spending on infrastructure, it is among the few fresh sources of revenue included in the plan.

The potential for more federal scrutiny of crypto transactions is rattling nerves in the nascent financial technology industry, which has so far escaped the kind of rigorous oversight applied to traditional financial services.

“What regulation will come, and from which agencies, is not clear yet, but make no mistake — regulation is coming for the industry,” Owen Tedford, an analyst at Beacon Policy Advisors, wrote in a note to clients on Friday. “Lawmakers and regulators are taking cryptocurrency concerns seriously and seem poised to make sustained efforts on multiple fronts to bring it out of the shadows.”

Earlier this year, the Biden administration outlined a variety of policy priorities and how they could be used to raise revenue, including bringing the crypto industry under more I.R.S. scrutiny. The administration initially proposed requirements for reporting cryptocurrency transactions as part of its broader initiative to narrow the $7 trillion so-called tax gap.

That Treasury Department plan, however, came with additional funding to help the I.R.S. crack down on tax cheats — money the Senate infrastructure package does not include. That could make it more difficult for an already strapped agency to crack down on a high-tech industry that has developed almost overnight.

A preliminary draft of the Senate legislation, which The New York Times obtained, has broader language than the Treasury Department’s proposal. The administration’s plan would apply new reporting requirements to cases in which taxpayers bought crypto assets from one broker and then transferred them to another broker. It would also apply to businesses that received crypto assets worth more than $10,000. According to the Treasury’s estimates, that proposal would raise a “negligible” amount of revenue.

The Senate bill, which could still change, proposes similar reporting requirements but includes a broader definition of a cryptocurrency broker to mean anyone who facilitates transfers of digital assets.

Some cryptocurrency brokers already report their transactions to the I.R.S., but most do not because of ambiguity in the existing law.

The cryptocurrency industry contends that it wants more regulatory clarity, but some of its members warn that the far-reaching definition of a broker could have unintended consequences.

Perianne Boring, president of the Chamber of Digital Commerce, a lobbying group, said the legislation was being drafted too quickly. She argued that by defining cryptocurrency brokers so broadly, it could impose disclosure requirements on everyone involved in the industry, from the “miners” who make digital money to technology developers and investors.

Saddling participants in the industry with regulations that they may be unable to comply with, Ms. Boring suggested, would most likely undermine the goal of the bill.

“This can have a pretty significant impact on the development of some of the most important areas of innovation or will likely kill part of the industry or drive it overseas,” she said. “We should be embracing this technology, not regulating it out of existence.”

Drew Nirenberg, a spokesman for Senator Rob Portman, the Ohio Republican who helped draft the legislation, pushed back against the idea that the proposed rules would hurt the industry.

“This legislative language does not redefine digital assets or cryptocurrency as a ‘security’ for tax purposes, impugn on the privacy of individual crypto holders, or force nonbrokers, such as software developers and crypto miners, to comply with I.R.S. reporting obligations,” he said. “It simply clarifies that any person or entity acting as a broker by facilitating trades for clients and receiving cash must comply with a standard information-reporting obligation.”

With regulators circling the industry, cryptocurrency firms have been stocking up on high-priced lobbyists to help shape the coming rules.

This week, Senator Elizabeth Warren, Democrat of Massachusetts, sent a letter to Treasury Secretary Janet L. Yellen urging her to mobilize the Financial Stability Oversight Council, which she leads, to coordinate a strategy to “mitigate the growing risks that cryptocurrencies pose to the financial system.” Ms. Warren is particularly concerned about the threat that they pose to banks and the growing exposure to cryptocurrencies at investment vehicles such as hedge funds.

Senator Sherrod Brown, Democrat of Ohio, issued a stark warning about cryptocurrencies at a Senate Banking Committee hearing on Tuesday.

“There’s nothing ‘democratic’ or ‘transparent’ about a shady, diffuse network of online funny money,” Mr. Brown said. “After a decade of experience with these technologies, it seems safe to say that the vast majority haven’t been good for anyone but their creators.”

Top U.S. financial regulators met this month to discuss stablecoins, asset-backed digital currencies that are exploding in popularity so quickly that the government is struggling to keep up — and the risks that they pose to the financial system and national security.

Putting in place new reporting requirements on cryptocurrencies would not be easy, and it is not clear that they would raise the amount of revenue that lawmakers hope. Such calculations are challenging because the Joint Committee on Taxation or other organizations have to base them on estimates about the size of the industry.

Eric Hylton, formerly the executive director of international operations for the I.R.S. criminal investigations division, said shedding more light on the world of cryptocurrency would still go a long way toward reducing the tax gap.

“The insight will be beneficial in regards to individuals that are trying to hide their income,” Mr. Hylton said. “I think it would be a huge win for everyone within the tax ecosystem.”

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