By Jasper Hamill
People who receive NFTs could be thrown into prison under President Biden’s new crypto laws, it has been alleged.
On Monday, November 15, the $1trillion Infrastructure Investment and Jobs Act (IIJA) was signed into law. Described by the White House as a “once-in-a-generation investment in our nation’s infrastructure and competitiveness”, the Act mandates the building of roads, bridges, and railways as well as the expansion of access to high-speed internet and the provision of clean drinking water.
However, the IIJA contains controversial new laws which have been described as a “crypto tax”. Critics of the legislation have alleged that it will mean Americans who receive an NFT, digital asset or cryptocurrency deposit worth $10,000 or more could be jailed unless they declare the transaction correctly and identify the sender.
In a briefing paper published on November 15, the Cato Institute, a libertarian think tank, said the Act ”signals the beginning of an attack on the cryptocurrency industry”.
It continued: “If Congress does not wish to see the cryptocurrency industry leave the country just as the United States is becoming a global leader in cryptocurrency mining, Congress should amend the provisions that have set a de facto ban on legal cryptocurrency mining and exposed over 60 million Americans to new felony crimes. Failure to do so will likely result in numerous legal challenges from the industry—especially if said provisions continue to rest on such a weak foundation.”
There are two controversial provisions in the bill. The first is an amendment to Section 6045(c)(1), which is often called the “broker provision”. This will define “any person who… is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” as a broker, meaning that they will have to collect the name and address of people they transact with and make annual reports to the IRS. The law is expected to exempt developers, miners, and hardware or software providers.
The second amendment is a change to tax code section 6050I. This law currently requires anyone involved in a business transaction in which $10,000 or more is exchanged to report the transfer, as well as the name, address, phone number and other identifying information of the payer.
Violations of this tax code are heavily punishable with a fine of up to $25,000 or up to five years in prison.
“Such a consequence should not be the result of any law that has not been properly debated or heard by the public,” the Cato Institute’s paper continued.
A report from a group called the Proof of Stake Alliance went further, suggesting that a transfer of NFT could end with the recipient being put in a jail cell.
“The trigger for the statute is simply a ‘receipt’ and the surveillance and reporting requirement falls on the recipient,” the Alliance wrote in a research report. “So, simply ‘receiving’ NFTs will trigger the statute.”
It added: “Section 6050I, in contrast, imposes surveillance and reporting duties on all Americans. In a broad range of scenarios it requires any person who “receives” digital assets to report the sender’s Social Security number and other sensitive information to the government.
“Under section 6050I, the failure to promptly and accurately verify and report the required
information — information which might not exist — can be a felony resulting in prison time. It will require Americans to become the custodians of one another’s most private personal and financial records. And ultimately, it will give a decisive advantage to the existing, heavily-regulated financial intermediaries that are well-practiced in reporting your financial dealings to the government.”
To avoid being fined or locked up, a person who receives an NFT or other digital assets over the legal threshold needs to record the payer’s personally identifiable information, which could involve verifying their driver's license or another form of ID. Then they must fill out a form relating to the transaction accurately under risk of perjury, which must be mailed to the government within 15 days.
And if you’re sending a $10,000 NFT to a friend, make sure you don’t encourage them to avoid declaring it and filling out the appropriate form - because that’s a crime as well.
Be careful out there...
