Cryptocurrency community in America divided and outraged over new and tighter ‘Tax Compliance’ regulation: Will “Proof of Work” or “Proof of Stake” system win?

Cryptocurrency Community Tax Regulations
America supports Proof of Work and not Proof of Stake for Cryptocurrencies? Pic credit: Marco Verch/Flickr

The Blockchain-based cryptocurrency community, consisting of brokers and crypto-miners, has jointly opposed a few tax compliance amendments. Interestingly, the Biden Administration seems to have driven a wedge further between the “Proof of Work” and “Proof of Stake” cryptocurrencies.

The Republicans and Democrats seem to have reached a rare agreement on a new Infrastructure Plan. However, a bill that mostly discusses rebuilding America’s aging infrastructure, has upset the cryptocurrency mining and trading community.

Multiple small and big cryptocurrency stakeholders jointly oppose the new ‘Digital Asset Provision’ within the new Infrastructure Plan:

The Biden Administration is seeking $28 Billion to spend on rebuilding and redeveloping America’s decades-old infrastructure. Interestingly, both sides in the Government seem to agree to the plan.

There’s however panic among the cryptocurrency community primarily because there are some sweeping changes to the cryptocurrency regulation.

The discontent stems from a bit that would declare anyone “responsible for and regularly providing any service effectuating transfers of digital assets” to be a broker, subject to tax reporting requirements.

The wordings may seem fairly obvious in the world of traditional finance, cryptocurrency is a whole different ballgame. By its very nature cryptocurrencies such as Bitcoin, Ethereum, Dogecoin, etc. are decentralized.

Simply speaking, cryptocurrency developers, companies, and even anyone mining digital currencies may not be able to collect and report information on users.

Cryptocurrency broking platforms such as Square, Coinbase, Ribbit Capital, and other stakeholders have gone further and called the amendment “financial surveillance”.

Taking note of the complexities involved, Finance Committee Chairman Ron Wyden (D-OR) and Pat Toomey (R-PA) have asked the Biden Administration to change the language of the bill. Wyoming Senator Cynthia Lummis and Colorado Governor Jared Polis have supported the same.

Strangely, there’s another proposed competing amendment that complicates matters further. In fact, the amendment seems to further divide the cryptocurrency community.

Proof of Stake must comply with new Tax regulations but Proof of Work need not?

Traditionally, cryptocurrency mining involved solving increasingly complex math problems. This involved deploying powerful and power-hungry computers. Such a type of cryptocurrency is called ‘Proof of Work’.

There’s a new type of cryptocurrency that relies on storage capacity. Called ‘Proof of Stake’ systems, these rely on participants taking a financial stake in a given project, locking away some of the cryptocurrency to generate new coins.

Needless to mention, Proof of Stake is a far less energy-intensive and hence, climate-friendlier alternative. It does, however, severely impact the life of the storage medium.

The baffling aspect of the amendment is that it seeks to exempt traditional cryptocurrency miners who participate in ‘Proof of Work’ systems from new financial reporting requirements. However, the newer and comparatively eco-friendly ‘Proof of Stake’ systems must comply with the near-impossible tax regulations.

Needless to conclude, these are confusing and trying times for the cryptocurrency community. Interestingly, a few popular cryptocurrencies such as Ethereum, are migrating to the Proof of Stake system. Meanwhile, Bitcoin, the original cryptocurrency is still committed to Proof of Work.

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