Remember the $1 trillion infrastructure bill, which caused considerable backlash from the crypto community due to the language regarding “brokers?” Abe Sutherland, an adjunct professor at University of Virginia School of Law, believes another provision tucked inside the bill could end up being a far more significant issue for anyone transacting in digital assets. Show highlights:
- how Abe fell down the crypto rabbit hole
- what provision 6050I is and how it could affect anyone transacting with digital assets
- how 6050I works and when it would apply
- why violating 6050I would be a felony
- how 6050I discourages digital asset transactions
- how 6050I would apply to different transaction types, like peer-to-peer trades, NFT sales, and smart contract escrow accounts
- what information recipients of digital assets must verify from the sender
- how the government came up with the $10,000 reporting threshold and why Abe believes this number is outdated
- why Abe thinks proposing 6050I within the infrastructure bill is inappropriate
- what reasons the government has to want to put such stringent reporting requirements on digital asset transactions
- how 6050I fits under the financial laws of the Bank Secrecy Act
- why Abe believes the amendment should be struck from the infrastructure bill
- what Abe thinks of the constitutionality of 6050I
- how Abe views 6050I as less about generating tax revenue and more about tracking people’s digital asset transactions
- what action steps he says the crypto community can take to fix the bill
Thank you to our sponsors!
Crypto.com: https://crypto.onelink.me/J9Lg/unconfirmedcardearnfeb2021
Nodle: http://nodle.io/unchained
Episode links
Abe Sutherland
Medium Post:
Information on 6050I
- Abe’s research report
- Tweet thread from Abe
- 6050I article Abe wrote for Bitcoin Magazine
- Abe’s appearance on What Bitcoin Did to discuss 6050I
- Twitter spaces with Congressman Warren Davidson, Peter McCormack, and others regarding the infrastructure bill
- Miscellaneous 6050I links
Unchained coverage of the infrastructure bill
- How Congress Might Pass Laws Bad for Proof-of-Stake and DeFi
Coverage on the original amendment regarding “brokers:”
Transcript
Laura Shin:
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the October 26th, 2021 episode of Unchained.
Crypto.com:
The Crypto.com App lets you buy, earn and spend crypto, all in one place! Earn up to 8.5% interest on your Bitcoin and 14% interest on your stablecoins – paid weekly! Download the Crypto.com App and get $25 with the code “LAURA” – link is in the description.
Nodle:
The Nodle Cash App makes earning crypto on your smartphone as easy as turning on your bluetooth. Nodle Cash is private, secure, and available on IOS and Android. Visit nodle.io/cash to start earning.
Laura Shin:
Today’s guest is Abe Sutherland, an advisor to the Proof of Stake Alliance and adjunct professor at the University of Virginia law school. Welcome Abe.
Abe Sutherland:
Thanks Laura.
Laura Shin:
Today We’ll be discussing a provision in the infrastructure bill that amends tax code section 6050I. We’ll be talking about its implications for people transacting in crypto or even NFTs. But first Abe, why don’t you give us a short history of your professional background and how you came to be involved in crypto and what your current involvement is?
Abe Sutherland:
Sure. So I’m a lawyer, but got interested in cryptocurrency and its fundamental economics, which led me to some tax questions because tax issues are some of the most practical elements of a proper understanding of how decentralized cryptocurrencies work. That got me interested in substantive tax issues. And what we’re about to talk about today is actually very, very different. It’s not substantive tax, but it came up in the context of the tax code in this infrastructure bill. And that’s what brought my attention to it.
Laura Shin:
So let’s dive into the meat of the discussion. Tell us about this proposed amendment to section 6050I. What does it require?
Abe Sutherland:
Well, the first thing is, to point out, that this is something very different than what a lot of people are familiar with in this infrastructure bill. This infrastructure bill was passed by the Senate in early August. It’s still pending now in the house.
And what we heard about and what eventually garnered headlines and a lot of attention and including debate on the Senate floor was a different section regarding the definition of a broker that would be required to report their customers tax information to the IRS. This is different. This is a separate amendment to that same bill. But unfortunately it hasn’t gotten the the attention, which is what I’ve been focusing on. This provision, as you say, is an amendment to tax code 6050I. It requires recipients of digital assets in a lot of situations to verify and record and report the personal information, social security number, address, additional personal information, of the person from whom there they are receiving the digital assets and, under the current rules, to report that to the IRS within 15 days.
Laura Shin:
And so why have you been sounding the alarm about this?
Abe Sutherland:
Primarily because I think it kind of slipped by and didn’t get the attention it deserves. And we’ll talk a little bit about why it might’ve slipped by. But the first reason is, this was put into an infrastructure bill, a spending bill, and it was justified there on the grounds of offsetting some of the cost of spending in this infrastructure bill. It’s known as a pay for. In general, that saying, Hey, how are we going to pay for this? We’re going to increase taxes or maybe close a loophole or do something that might increase the amount of taxes collected. So this was justified as a tax provision.
But one of the key points I want to emphasize here is that this really is not a tax provision, s we typically think of that. This is a criminal statute. It actually creates a felony that is concerned with the collection of information. Then a little deeper than that, is concerned with really fundamentally guiding and controlling how transactions are made. So this is designed to discourage peer-to-peer transactions and transfers of digital assets.
And what the statute says is that when a business receives digital assets over a certain threshold, and we’ll talk about that, it’s their duty to verify personal information and to report it. Right now, that’s on IRS form 8300, and I’ve mentioned that I encourage people to look it up. This is an existing law and an existing requirement for another type of transaction, which is transactions in physical cash between two people who we can presume are transacting face to face. So the reason that this provision didn’t get the attention immediately that it should have is it uses an old statute that was passed in 1984. It was designed to discourage large cash transactions as it is basically an anti-crime measure, anti-money laundering, anti-tax evasion, and it governs transactions between two people face to face. And that’s what it says. It says, if you receive cash in this situation over $10,000 you need to fill out this form and promptly file it with the government.
Laura Shin:
So let’s walk through various examples of what complying with this requirement would even look like for different types of crypto transactions. Why don’t we just start with a basic payment?
Abe Sutherland:
We can walk through some really clear applications, but that’s one of the problems here, and we’re going to explore that too, where it’s very unclear what it will do and how much discretion it gives to the Treasury Department. And again, some of these violations can be felonies, which is unique in the tax code, even for reporting provisions. Other reporting provisions, if there’s a violation, it might be a misdemeanor. But this one stands out for a, being a felony, and b, most of these reporting provisions don’t really affect end-users and consumers and businesses. They’re designed to utilize a middleman like brokers and employers who have this information and lean on them to report this information to the government, to ensure proper taxation. This one is very different in that it puts that burden on anyone and everyone.
So in a straightforward situation. Let’s start with the cash example because there, we can see where it’s clear and then we can start seeing how this leads to impossibilities for enforcement or at least compliance. So the first thing is, to note, that the statute is triggered and the requirement to file a report, whenever a person in a business situation receives cash. And it has nothing to do with the tax consequences. It doesn’t mean that might be taxable income. It doesn’t mean that it might even be revenue. You can be in a custody situation, right, where somebody hands you $15,000. And in some circumstances, it’s your duty to report that, even if you’re not going to keep it, even if you have no claim to it. So in that situation, in the cash scenario, you are required, the regulations are very clear, you must inspect an ID document and verify that they are who they are. And then collect a bunch of information. The statute requires a social security number, a name, and an address. Then there’s more information required. They want to know the occupation of the person who’s paid you the cash, the nature of the transaction, and other details about it.
When you receive that, then you have to fill out this form 8300. And again, I encourage people to take a look at it. And file it by mail it, or file it online with the IRS within 15 days. So that’s a straightforward transaction. If you go tomorrow and buy a car and pay with cash, this is what will happen. They will ask to inspect your ID, they’ll ask you for your social security number, and they will fill out this form 8300.
Laura Shin:
And I did see that you wrote somewhere, or somebody wrote somewhere, that on average, it takes 21 minutes to fill out form 8300.
Abe Sutherland:
Yeah. That’s one of the reasons I encourage people to look at this form and look at the instructions and look at the manuals. It’s a lot of detail. And that’s right. The government itself estimates that it takes over 20 minutes to fill out one of these.
Laura Shin:
And so that was a basic payment. What if we’re doing more like a crypto trade, peer-to-peer, two different digital assets for each other. Then what?
Abe Sutherland:
Let’s pause and focus for a second on the definition of digital asset in this statute. So what it says is any receipt of a digital asset, and this was discussed in connection with the infrastructure bill, this very broad definition. It means any form of digital value basically involving distributed ledger technology. And it might even be broader than that. It gives tremendous discretion to the Treasury Department to say, what exactly that is. So what that means is not only is this Bitcoin when used for payment, but it could be any form of a digital asset, but certainly including things like NFTs that we don’t think of as payment devices. And that also makes clear that you could definitely have a situation where the statute on its face commands both people to report on the other, because again, this is based on receiving a digital asset. It has nothing to do with the tax consequences. So a situation where one party ends up with an NFT and the other party ends up with some cryptocurrency, on the face of the statute, they both have to report the other’s social security number.
Laura Shin:
And what about cases in which someone’s transacting with a smart contract? Does this affect that type of transaction or no?
Abe Sutherland:
There’s a lot of open questions, because again, and this gets to why people haven’t really focused on this. The statute absolutely presumes that you’re talking about two humans handing over physical objects. So, you know, there’s some details on what it means to be to receive something. But in the context of digital assets, yeah, it’s kind of up in the air what the outer limits of that would be, and what happens if it is mediated by a smart contract. But we can at least assume that in certain cases or, or think about multi-sig situations, three different parties receive in a two or three situation, who might be committing a felony if they don’t report it? So those are questions about the nature of a receipt, but we can certainly say that in a lot of situations, you know, if there’s assets in an address under your exclusive control, that’s very likely going to be a receipt. But it also means it’s hard to imagine in the cash context, somebody not knowing.
But these are permissionless payments. So what happens if you quote-unquote, receive digital assets and are not aware of it, or you didn’t invite the transaction. Because again, it’s your duty then to, within 15 days, under the current rules to have verified and reported the information about the sender on the other side. But thinking about smart contracts, maybe you had some, I’ve got more thoughts on that, maybe who had something particular in mind…
Laura Shin:
I mean, not necessarily, but obviously there are situations where, for instance, let’s say that you and I are engaged in some kind of transaction, and we decide to use an escrow contract rather than an actual third-party escrow service. Then would you just report my personal information when you do this reporting? Or maybe it’s just something that’s not resolved?
Abe Sutherland:
Well, it’s not resolved, but it’s worth asking these questions because it exposes how incongruous this statute is with the technology that we’re dealing with. But it’s a great question and we should work through it to kind of speculate on what that would mean. If you put money into an escrow contract and it won’t be unlocked and in my possession until a future date. Now that’s a good question. My guess is, if I were trying to comply with this tomorrow, I would say, you know, it’s not mine until I have some intuitive notion of control over it in terms of what a receipt means. But it’s a very big open question. And again, one that you don’t really run into in the context of physical cash, because you’re both there and you know when you got it.
Laura Shin:
Yeah. I guess another one would be a peer to peer lending happening in DeFi, but those assets are pooled. So again, it’s not clear if they would require that somehow it is tracked and then the recipient has to report, but okay. So let’s actually just discuss another issue that you raised earlier, which is the threshold, which is $10,000. So is that just whatever the value of the digital assets are on at that moment of the transaction?
Abe Sutherland:
That’s the most likely interpretation, especially if you’re dealing with anything other than a dollar denominated coin. Yeah. It’s value on the time at the time or on the date. But the issue of the threshold is really important for other reasons. And again, we have to emphasize why this is just so different than physical physical cash, because with cash, you can say, oh, well, if it’s not a big transaction that doesn’t qualify and you don’t need to report it.
But the rules are actually more complicated than that. The transaction has to be at over $10,000 and that can include related transactions. And it can also include payments over time, which under the rules would be one transaction. So Laura, if I lent you $50,000 in some digital asset and you made recurring payments back to me, what the rules say, is that is that’s one transaction. So as soon as those payments add up to $10,000, that’s what triggers the requirement and the 15 day window to make a report. And if you continue to make payments, when those add up again to 10,000, it trips it again. So number one, you’ve got this duty to monitor and these valuation questions, which you raised. But also explaining why with digital assets, the whole definition of a qualifying transaction can be much, much broader and can extend over a period of time.
Laura Shin:
Yeah. And another issue of course, is that prices change a lot, even within the course of a day. So if I make a payment to you of $9,500 in Bitcoin or something that’s a similarly volatile, then who knows whether or not the IRS might say no, no, no, no, no. This was $10,000 based on the closing price of that day. So that’s another issue.
What’s your take on how possible it is for the sender and recipient to comply with these rules? Because one other issue was that I saw that they’re required to keep these records for five years. Just kind of on a security level, I just could imagine this could lead to lead to a lot of identity theft, because you’d have to give your information out to all kinds of people that you were transacting with. Well, I guess it depends on how often you transact $10,000 or more. But still, if they’re required to hold it for five years, how could you be certain that they were holding in a way that was secure?
Abe Sutherland:
Absolutely. So this opens up the typically behind the scenes practice of certain surveillance usually conducted by entities like banks or employers that kind of already have that information in place. And it applies this surveillance and storage and security burden on any business, as well as some others that might want to be involved. So it’s a very big concern. So not only is there a requirement to verify and gather this information, but the first requirement is at the end of the year, you have to send a statement to everybody whom you’ve reported during the year. And then just, as you mentioned, you must keep these records for five years. So yeah, it really radically expands kind of the implications of the surveillance efforts that the government is looking for, by opening it up to potentially any business.
And even broader than that, I want to make a point about that. So this applies to receipts in the course of your trade or business. And we tend to know it when we see it, but it’s important to note that that’s not defined clearly in the tax code. It is actually a test, which is applied by courts. And it has to do with whether you have gain seeking activity that’s suitably continuous and regular. That means that you’re doing something in the course of trade or business. And that’s important to note because even that definition, it could be unclear whether certain activity meets that test. If you’re a miner, if you’re a stalker, if you’re doing various lending activity, or significant trading, in some cases that can put you into the category of trade or business. But it’s not a clear line. And again, these are felonies. So the difference can be really important in terms of your compliance and legality.
Laura Shin:
Yeah. And so I did see that that would then be punishable by up to five years in prison and a $25,000 fine. Just out of curiosity, actually, why is the penalty for this so much more than for other violations?
Abe Sutherland:
Well, there’s some interesting history on this. This original law was passed in 1984. And then periodically over the years, it expanded, even this provision expanded. Actually we should go back a little bit further, and this is really important as well, to understand how this fits in with other forms of regulation. That, again, you know, some of us in crypto are familiar with, but it’s mostly behind the scenes and that is the Bank Secrecy Act dating to 1970. And what’s key there is the provision that began where requiring banks, but only banks, to report a very large $10,000 transactions. And in 1970, that was a big deal relative to now because $10,000 then was $70,000 today. So as inflation has eaten away at that, these thresholds have not changed.
So in 1984, as a part of a large tax overhaul, this provision was added. And then over the succeeding years, there were gradually amendments to it, which number one turned it into a felony. Because again, this is really not so much about tax, it’s about crime-fighting. So in 1988, as part of an anti-drug bill, at the height of the drug war, that’s when this was escalated to a five-year in prison felony as well as other little changes, right? Some people might be familiar with the concept of structuring. So when there’s a rule that says you have to be reported if you do something over $10,000, the first thing people do is, oh, I’ll bring $5,000 in today and $6,000 in tomorrow. So that’s a crime. So these different elements were added, including most recently, I think with the Patriot Act in 2001, strengthening and kind of closing down loopholes and increasing the amount of punishment here.
And that reminds me of one point that’s really important here. Some people might say, well, I’m not a business, and I’m never going to be a business. So I’m never going to have to report if I have a receipt of $10,000 or might add up to that over time. But it’s important to see how this creates a felony in five years for people who transact with others. So if you’re even a consumer making a payment of $10,000 or more on related transactions, if you interfere with the other with that business’s duty to report the transaction, that also is a felony. So if you try to dissuade them or you give them false information or give them a false social security number, that too can be a felony.
Laura Shin:
Yeah. But I like this thing about what you’re required to give them. When I read what the requirements, which are name, birth, date, address, social security number and occupation. It just feels like you’re giving away all the information that someone would need to like fake your identity and open a credit card. I don’t know how many people are going to be willing to do that.
But anyway, one other issue that was interesting was obviously crypto transactions are pushed transactions in which the recipient doesn’t have to do anything in order to receive a payment. So what would happen if someone unknown to the recipient sends them more than $10,000 worth of crypto?
Abe Sutherland:
Well, the first thing to note is if that recipient says, Hey, you need to give me this information, and that party willfully refuses, Hey, that’s a felony. So what’s going to happen in practice. Look, there’s so many unknowns about how the Treasury Department is doing to try and make this work. But, you know, thinking kind of commonsensically about what you do in these situations is the business will report it with the available information. And then do their best and say, Hey, I’ve tried my best. And then it’s up to the IRS to use those those clues.
I bought a car a few weeks ago and I paid in cash just to kind of experience this. And I was talking to the guy who sees form 8300 lot. And he was asking for my social security number and he kind of made a joke. He’s like if you don’t give it to me, you know, no big deal. I’ll make a note that I tried to get it. And then the IRS will give you a phone call. He had the rest of my information. He would have done his duty and then I would have gotten a call from the IRS.
Laura Shin:
As you say, the penalty for this is considered a felony, but it seems like at least when applied for cash transactions, people who typically work in this area don’t seem to think it’s such a big deal if they don’t dot all the I’s and cross all the T’s.
Abe Sutherland:
No, no, no. It’s a very good question. There’s all kinds of different penalties and the truth is in when it’s a felony, that’s a crime and you get a jury and you have to prove it beyond a reasonable doubt and you have questions of intent and so on. The fact that it’s a felony is really important because it can be used and that’s hanging out there, but there’s a lot of other options for the government to in enforcement. And typically it’s fines. And those fines, you said a maximum of $25,000, actually in some circumstances, $25,000 is the minimum fine for a certain type of violation. But minor violations can can also result in a smaller fines. So it’s not always going to be a felony, but the fines are very high, but the fact that it’s a felony is important and it’s important for raising attention to what was done in the course of a spending bill, right?
In a tax provision, in a spending bill, because it really cuts through and it should make really immediate and aware to the public what is going on in terms of government efforts with regard to digital assets generally and these tax issues. We lawyers who work in this space are familiar with it. And in fact, a lot of people are because these questions about what’s going on in Washington, people do pay a lot of attention to it, but this really makes it more immediate and puts it in our face because because of the way it affects kind of end-users, businesses, and even us just using digital assets.
Laura Shin:
So in general, what effect do you think that this provision could have on the effort to move to more decentralized business models?
Abe Sutherland:
We’ve got to look at the, kind of the next level implications of this and that. And as I mentioned before, the Bank Secrecy Act. So we have a very confusing regulatory hodgepodge in the United States with the different agencies involved in this. But here, I want to focus on something in particular. So this provision, which is now sitting in the House to be passed, is literally a tax code provision, but it works together with other regulations under the Bank Secrecy Act. And the Bank Secrecy Act generally doesn’t regulate you and me. It regulates banks and financial institutions. And financial institutions is actually a much wider category now than people thought. If you’re a money transmitter. And that means cryptocurrency exchanges and others, that turns you into a financial institution that brings you under these Bank Secrecy Act regulations. Those regulations already require financial institutions to report, just like this does, cash.
When I say cash now, I mean, physical cash, if you transactions involving more than $10,000 worth. But those regulations and this is complicated, but they do not yet today include in the definition of cash, these digital assets, not yet. Now back in last December, there was new regulations proposed with the outgoing administration in the Treasury department. And one of those was to alter the definition not in the tax code, but under the Bank Secrecy Act to include digital assets in that definition, thereby requiring financial institutions to report these transactions.
Now what’s important here, is if people remember, there was a lot of response to that. There was initially an expedited period for public comment that got a lot of press, and there was some pushback, and eventually they extended that period and those regulations are still pending.
But at least during that time, it was open to public review and there were comments and criticisms of this measure in terms of what it would do, including for issues of privacy and record-keeping, right? Even for financial institutions that suddenly had to perform all of this verification and reporting of certain types of transactions. But here’s the key thing, that new regulation hasn’t been passed yet. This provision, unlike that unlike the Bank Secrecy Act stuff, which only applies to financial institutions, this applies to everybody, all businesses and anybody working in the course of their trade or business. And unlike even that regulatory process it was put into a spending bill with no discussion. And this creates a felony for the rest of us. If this goes into effect, if this 6050I amendment goes into effect without the Treasury Department’s Bank Secrecy Act regulations, we’ve extended to everybody something that should be met with very serious concerns, even when applied to merely financial institutions. So that’s an important, but very complicated point to help explain how inappropriate this procedure was. Even if, you know, somebody says, hey, this is a good idea. We need to do this. It’s worth it to kind of cut down on tax cheats or whatever the ultimate justification is. We should be able to find agreement that this is not kind of procedurally the way to do something that is so important.
The other reason it’s so important to talk about the Bank Secrecy Act. Let’s assume now that the Bank Secrecy Act catches up with this new felony, which applies to all of us. The only exceptions to this reporting requirement, and this is the case now under the cash one, is if that transaction is already being reported by a bank or another financial institution.
Okay. Why is that? Well, that’s the goal. If they’re reporting it, you and I don’t have to. And this is why: if in the course of your trade or business, you withdraw $50,000 in cash from a bank. That’s the reason why you don’t have to report the transaction, including the information from the bank — sounds absurd, right? Why would you have to do that? Well, it’s because they’re doing it for you. So what is the kind of fundamental structure and intent of this provision? It is to discourage the use of, before, it was large amounts of cash. Now it’s to discourage the use of digital assets, why? Well, the government would like to track and observe and be able to account for these transfers. So it discourages the use of peer-to-peer technology in two direct ways.
The first thing is, hey, I don’t want to take down your social security number, Laura, and be on the hook for all of this stuff and you wouldn’t want to give it to me, so forget it. Why don’t we just use a bank transfer? Okay. That’s the first instance, like, forget, you know, anything digital to begin with. Let’s just go back to the complete legacy system.
But the second thing is, even if we want to kind of nominally use digital assets there, why not funnel it through your bank? Why not use an existing financial institution? And therefore they take the surveillance and reporting responsibilities, and we don’t. Maybe that’s a good idea. And maybe digital assets are just too costly in terms of compliance and all these law and order objectives, but we need to have that discussion, right, because that very clearly is designed to eliminate the peer to peer feature of this technology. And yet some people may view that as a purely something to be avoided. But a big decision like that should not be hidden and not analyzed and tucked into an infrastructure spending bill.
Laura Shin:
Right. So in a moment, we’re going to talk a little bit more about the government’s kind of intentions here, but first, a quick word from the sponsors who make this show possible.
Crypto.com:
The Crypto.com App lets you buy, earn and spend crypto, all in one place! Earn up to 8.5% interest on your Bitcoin and 14% interest on your stablecoins – paid weekly! Download the Crypto.com App and get $25 with the code “LAURA” – link is in the description.
Nodle:
The Nodle Cash App makes earning crypto on your smartphone as easy as turning on your bluetooth. Nodle Cash is private, secure, and available on IOS and Android. Visit nodle.io/cash to start earning.
Laura Shin:
Also, I’m going to go turn on some lights because the sun’s going down. I just feel like I quite a dark one second.
Laura Shin:
Back to my conversation with Abe. So from the government’s perspective, what would you say is the purpose of this provision? Like, do you think that they’re actually trying to get people to use the banks as opposed to using these digital assets in a peer-to-peer fashion? Or do you think it’s just the tax reason? Like they just think people are avoiding taxes, or what do you think is the real reason for this?
Abe Sutherland:
Yeah, it’s tough. I don’t want to speculate on kind of the mental states of the people who actually put this in too much. And that’s one of the reasons why it’s a problem, right? We don’t have an explanation. We don’t have clarity on what the evil is that this is attempting to address. So people say, well, what would I propose? And I say, well, I don’t even know what the problem is. It hasn’t been stated.
But it is fair to look at this structure of this 1984 law that’s being repurposed to do this. There it is clear that this is a crime-fighting effort. And it’s an attempt to go after, starting in the eighties in particular, kind of drug money and money laundering and to discourage the use of cash.
And that’s very clear. And another point on kind of how this is used in the past and present and why this is kind of so odd to treat this as a tax provision: these forms 8300 that we’ve been talking about, these are used in fighting crime. They’re distributed to federal and state law enforcement agencies to help build cases, not about necessarily tax evasion, but about anything, because, Hey, who and why would somebody be the having and holding this much cash and it provides grounds to go investigate people. So we know that much about the history of this provision.
Beyond that look, there are absolutely legitimate and very serious questions about kind of peer-to-peer technologies, right? And the ability to do things without governments. But these deserve very serious discussion in an understanding of competing values.
And one thing we haven’t talked about yet, and it’s important to get clarity on what the law does before we turn to kind of legal issues, is this is very problematic under our legal principles. And we have a fourth amendment, which protects us against unreasonable searches and seizures. And there’s a whole history there about how the Bank Secrecy Act was was upheld in the face of some of these challenges, but there’s very serious differences here where at least with banks, it’s a third party that’s put in this position and is reporting people’s private financial information to the government for these various tax and other crime crime-fighting purposes. But here, we’re enlisting our neighbors and our other Americans, other American businesses, and saying, it’s, it’s our duty to report on them. And that’s very different, right? It’s different legally. It’s different in its impact on people. And it works to kind of undermine intentionally the technology that we’re all kind of excited about.
But there are very serious concerns about counter-terrorism or tax enforcement, or other crime-fighting. But on the other hand, we’ve got a fourth amendment, and we’ve got principles of privacy and those those need to be addressed in the open and not slid into a spending bill.
Laura Shin:
Yeah. And before we get more into the Bank Secrecy Act issues, I did want to just ask, I did see Market Watch reported that supporters of this provision say that these reporting requirements are needed so the IRS can collect taxes that are owed to the government, and that this would just put crypto on the same playing field as cash. Do you agree with that? What’s your response to that?
Abe Sutherland:
Yeah, it’s important to, to point out a few things. First of all, form 8300, you’re not reporting income, you’re not reporting even revenue or anything. In some sense, it could expose people who are working in the cash economy who don’t already have their transactions tracked and traced by going through the banking system. But I’d love to see an explanation of how that actually works in light of what we already know about the history of this provision. Calling it on the equal footing, there’s something seductive about that.
What’s the best case for this scenario if you’re a lawmaker and presumably don’t understand that much about digital assets and what is enabled by this whole realm of peer-to-peer technology. There’s one way of looking at this, of looking at a Bitcoin, right?
That you say, you know what, that Bitcoin has something in common with drug money, in wads of hundred dollar bills. And that is one person can hand it off to another person and the IRS and the department of justice might not hear about it. Right? That’s the argument. If you only see in digital asset technology this element of what it accomplishes, you can see why, and you say, oh, wow, we’ve got this 1984 law. Nobody really knows about because it’s accomplished its goal, right. People don’t transact in wads of cash since it involves this legal burden and a risk of fines and so on, and me having to get your social security number. To the extent cash wasn’t already on its way out, yeah, it’s now the case that you’re probably a criminal, if you’re using large amounts of cash, because who else would do it, who else would subject themselves to sharing their information and all of these risks of getting audited or even prosecuted under the law. So it’s accomplished its goal in that sense. So that’s the best you can come up with is, is if you only see Bitcoin as an alternative to a suitcase full of cash, you can maybe see an argument for for extending this, but there’s a much bigger picture, obviously.
Laura Shin:
So going back to the constitutional issues, Coin Center’s director of research, Peter Van Valkenburgh believes that this provision is not constitutional in its original formulation. Let alone in this provision applied to cryptocurrencies. So can you explain why it might not be constitutional and how it’s survived this long if it’s not?
Abe Sutherland:
Right. So again, we have to start with the cases that upheld the Bank Secrecy Act rules in the 1970s, which really was a big development, right. And I think it’s important to look at this in the sweep of history. Banks have evolved over hundreds and hundreds of years to facilitate different things. And it’s only really in 1970 that the government focused on them as kind of a middleman and the centerpiece of holding access to information that would serve the government’s ends in crime-fighting, money laundering, and tax evasion. So starting in 1970. Those were challenged and the Supreme Court’s basis for saying that no, he bank sharing of this information does not violate people’s kind of standard expectations of privacy is saying, Hey, you’ve handed this information over to a bank, and they’re a third party, and this is information that they record, and you know, that they’ve got it.
So if they share it with us, you can’t complain under the fourth amendment. Two things have happened since then, there are two themes that are important. The first is just to note how 6050I’s very different, right? This is not about a bank. This is about you and me, right? This is a situation where I’m not gonna ask you for your social security number and all of this personal information as a normal course of me getting this from you. And the government both demanding that I collect it and then share that. So, in other words, the third-party doctrine, which is the basis for the Supreme Court’s approval of these other collection techniques imposed on third parties like banks, doesn’t apply here. And the second is that even that doctrine of third party doctrine has been getting additional scrutiny as it’s expanded over the years. And I won’t go too far into these more recent cases, but basically, it’s saying, Hey, just because people share information with third parties doesn’t necessarily mean that they no longer have a reasonable expectation of privacy. So those are the two themes that differentiate this, especially when it’s expanded to something like digital assets.
Laura Shin:
So if this provision does get passed, which it looks like it probably will, what do you expect will happen?
Abe Sutherland:
Wow, well, you know, it hasn’t passed yet, and I’m not a parliamentarian or a Congress expert on kind of how these things go. So my first emphasis is, Hey, this law hasn’t passed. And once it’s passed, it needs to be signed by the President. And until that’s happened, people need to make their voices heard on it. The first thing would be assuming it is passed is to simply repeal it. There’s no fixing this, at least under this old 6050I statute. If the government really wants to develop and come up with a measured way to address some of these things they can try that, but I would say the first step is to repeal it. So the first step then if it’s past would be to repeal it, but then as indicated by this discussion of the fourth amendment, absolutely, there will be legal challenges.
Laura Shin:
Yeah. I did see Coin Center saying it would be prepared to make a constitutional challenge. So then for that to happen, does it just entail finding the right case to take to court?
Abe Sutherland:
That’s right. That’s its own complicated endeavor bringing a well-informed, well-considered legal challenge that, that allows the courts really to address the core issue.
Laura Shin:
And I’m just actually going back to kind of the different use cases or not use cases, but like ways in which this provision might be applied. So for something like a purchase of NFTs. I guess it goes back to what you were saying about how it’s not clear for some of these transactions, how they’re even taxable events. So the government is saying that this reporting is necessary to collect all the taxes that they’re owed then, which of some of the different examples that we discussed are actually taxable events in which they would collect taxes from that transaction.
Abe Sutherland:
Well, it’s important to emphasize again, this really is not about that. So like in the broker provision, right? They’re separate things that involve this debate. One of the things that they want from brokers is information about your cost basis, right? Things that are very relevant to calculate tax. That’s not what’s going on in this provision. Again, you might have zero tax consequences. It may lead them to say, oh, here’s somebody with a bunch of cash. Let’s investigate and see if they’ve been hiding more cash, but there’s no direct connection. There’s nothing on the face of the form, 8300. It’s not even among the information there for you to explain what the tax consequences would be. So there’s really nothing.
Laura Shin:
Oh, that’s fascinating. But, so I guess I don’t fully understand. So the IRS requires form 8300 for cash transactions over $10,000, but do they ever collect taxes based on that information that they’ve provided?
Abe Sutherland:
I’d have to look more closely, but I don’t think the form 8300 on its own ever would give information that directly determines a tax liability. It will tell you that that business received $10,000. And then if that $10,000 isn’t accounted for in the tax returns, it would give you someplace to look. But again, you you’re exactly right, Laura, this is an important point. It does not lead directly to any tax consequences.
Laura Shin:
So going back to the NFT example, one way in which I could imagine it resulting in a taxable event would be, if I create an NFT and then I sell it to you for more than $10,000, then that’s earnings for me. So would that be an example?
Abe Sutherland:
Yes. Yes. So you’re the recipient of my digital assets in this example, right? So you sell to me an NFT. I end up in the NFT, you end up with that money. Yes. The IRS could use it, but I don’t think that’s really how they do use it. This is another reason why this provision is such an outlier in the tax code. It’s really less about the recipient, which are typically businesses, than it is about the payers. The IRS is looking for information about the, who are these people showing up and paying $15,000 in cash for a car, or buying gold, or now an NFT? The fair understanding of the purpose of this is less about the business, right? And more about the person sending cash or now digital assets to the business.
Laura Shin:
Okay. So what do you think would be a better solution here to achieve the government’s goals?
Abe Sutherland:
Again, I want us to kind of stay firm on this. I don’t know what the government’s goals are. We don’t because they didn’t announce it. It wasn’t discussed. There wasn’t a committee report. There wasn’t an explanation of what this evil is. And that’s important really for kind of gathering opposition to this. Even if people are saying, Hey, you know, we need to be more careful, or who cares about the fourth amendment and who cares about financial privacy? Those people could still say, well, at least we should discuss it. We should hear what those different concerns are. I don’t know what the alleged danger really is. So I don’t want to develop it too soon, except to acknowledge these are some very deep questions, which is why the technology is exciting.
Unlike you know, 50 years ago, the Bank Secrecy Act, banks and these financial institutions turned out to be a really useful chokepoint for the way the world has evolved since then, they’ve become really important in ways that they weren’t a hundred years ago, but starting in 1970, they are. And as this technology opens up new possibilities for all kinds of things and through peer-to-peer and these other features, that threatens that old order and a system for maintaining surveillance that the government’s become very comfortable with. That’s a big issue. It needs to be addressed, but we also have expectations of privacy. We have principles of autonomy, and we have a fourth amendment, and we have a general principle, which says, Hey, in this country, at least you’re free to do things without asking permission. And if the government wants to stop you, they need to explain what they’re doing and justify it. And certainly that’s the case. If they want to attach a felony crime to something that today is completely legal and which is something enabled by a new technology.
Laura Shin:
All right. Well, what do you think the crypto community should do to address this issue?
Abe Sutherland:
I’m fighting for attention to this point and if we get it, that’s a good question. The vote in the house has been postponed several times. They’re now saying it might happen as soon as the 31st, who knows. I wrote a report on this. You’ve mentioned it for the Proof of Stake Alliance. I urge people to look at it. And I tried to lay out the elements that we’ve been discussing to explain what this does, but I didn’t try to list all of the terrible consequences because there’s too many and there’s too much uncertainty, but it applies to straight forward kind of Bitcoin transactions. It has a special importance for this wild, new world of NFTs. And we at least have to spend a minute on DeFi for people to appreciate how potentially the text of the law could, could be effectively criminalizing things in a way that it may be impossible to comply with, right, because this 1984 law just doesn’t make sense.
So as to what people should do is read the report, read the statute, read the information available on it, and ask these questions that its sponsors and Congress did not ask did not ask Treasury to explain and start exposing the consequences to it in whatever way works.
We definitely are starting to get attention on Capitol Hill. The fact that the, the vote in the Senate went through so quickly kind of made it much more difficult to get people to dig into this, but I think it’s starting to happen. So 6050I, that last digit, it’s not a one, it’s an I. Let’s get it to trend and get people to to ask why this wasn’t considered more carefully.
Laura Shin:
Great. Well, where can people learn more about you and 6050I?
Abe Sutherland:
Well, as of this event or this issue, I’m now on Twitter @AbeSutherland. You can find links there. Please look up the Proof of Stake Alliance. Look up 6050I, download and read that report and try and ask those questions about how this will apply.
Laura Shin:
Perfect. Well, thank you so much for coming on Unchained. Thanks so much for joining us today. To learn more about Abe and 6050I, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thanks for listening.
