An unworkable and arguably unconstitutional tax change tucked away in the infrastructure bill

§6050I requires counterparties to surveil each other, even without an intermediary

Much has been said of the dangerously ambiguous revised definition of “broker” in the infrastructure bill and its potential to stifle cryptocurrency innovation in the U.S. There is, however, another big problem with the infrastructure bill: §6050I. That provision of the U.S. tax code currently obligates businesses to file reports (including names and Social Security numbers) about their counterparties whenever they receive more than $10,000 in cash. The infrastructure bill would require similar reporting when businesses receive more than $10,000 in cryptocurrencies. Today the Proof of Stake Alliance published an excellent report [PDF] by Abe Sutherland explaining why the provision is a big problem for innovation.

Typically we don’t object to equal treatment of cash and cryptocurrencies, but the §6050I reporting provision is a draconian surveillance rule that should have been ruled unconstitutional long ago. Extending it to cryptocurrency transactions would further erode the privacy of law-abiding Americans. As the report describes in detail, §6050I would also be anachronistic and therefore difficult or impossible to obey in the context of cryptocurrency transactions.

Coin Center previously published an extensive report on the constitutionality of the Bank Secrecy Act. The BSA and its mandated reporting from banks and other financial institutions is a warrantless surveillance regime that hoovers up the banking details of every American, irrespective of any suspicion of crime, and hands that deeply personal information to law enforcement and intelligence agencies without any check or balance from the judiciary. The only reason that kind of privacy invasion is tolerable under the Constitution is the fact that banks are a third-party to the transactions of their customers. Bank users willingly hand transaction information over to a bank as a condition of using banking services and banks retain that information for legitimate business purposes. This is the essence of the so-called “third-party” doctrine which obviates the otherwise applicable Fourth Amendment warrant requirement.

Why is that review of BSA constitutionality relevant to our discussion of §6050I? Because §6050I reports are also deputized surveillance but there is no third party. One person to a two person transaction is obligated to collect a load of sensitive information from her counterparty and hand that to government officials without any warrant or reasonable suspicion of wrongdoing. (In the case of two persons exchanging two different cryptocurrencies, they each would have to report on the other.) The law literally asks one American citizen to inform on another if the transactions in which the two are engaged are “business” and if they take place using cash (and, if the infrastructure bill passes as drafted, cryptocurrencies too). Section 6050I has seldom been challenged despite this seemingly obvious constitutional infirmity. A case in 1991 made it to the Second Circuit Court of Appeals (U.S. v. Goldberger Dubin, P.C.), but the judge in that case egregiously failed to explain how the third-party doctrine operates in this context. He simply cited the Bank Secrecy Act cases Miller and Shultz and said the Fourth Amendment concerns lacked merit. An obvious question remains: why does the third-party doctrine described in the BSA cases apply when there literally are only two parties involved? Why is it constitutional for the police to force one American to collect information from their fellow citizen when they could not collect that information themselves directly without a warrant?

The infrastructure bill remains in limbo, the broker provision is still a big problem, but our most difficult battles may be yet to come, including fighting the blatant denigration of our constitutional rights embodied in §6050I cash (and maybe cryptocurrency) reporting. If this provision becomes law, it will be ripe for a constitutional challenge and Coin Center is prepared to take on that challenge.