As bitcoin's price surges, crypto's power in Washington withers

The price of bitcoin has been on a tear in recent weeks, but for crypto-industry boosters in Washington, the price gains are cold comfort, as their influence in the nation’s capitol appears to be waning.

The latest blow to the cause was the announcement Tuesday by Republican Rep. Patrick McHenry of North Carolina that he would not seek re-election in 2024.

As chair of the House Financial Services Committee, McHenry was crypto’s fiercest champion on the Hill and fought to get an industry-backed regulatory-reform bill through the committee — only to see it run aground in a Democrat-controlled Senate.

The industry is lamenting McHenry’s decision, with Kristin Smith, CEO of the industry group Blockchain Association, telling MarketWatch that “we’re sad to see such an industry champion leave the House.” She added that the group is “pleased to be able to work closely with [McHenry] for another 13 months.”

Read more: House financial panel chief McHenry won’t seek re-election, as Democrats could win control of chamber next year

Ian Katz, an analyst at Capital Alpha Partners, warned investors in a Wednesday note to clients that even if Republicans hold the House after next year’s elections, an incoming GOP committee chair may see crypto as “a lower priority” even if they agree with McHenry on the merits.

“Even if the bills were to pass the House next year, the Democrat-controlled Senate would remain a major obstacle,” Katz said, noting that recent reports of crypto being used as a tool by Hamas have only dampened Democrats’ appetite to move crypto legislation.

One industry insider lamented in an interview with MarketWatch that McHenry’s retirement announcement could undermine his leverage within the Republican caucus in negotiations to get his crypto market structure and stablecoin bills passed in 2024.

None of these headline risks, however, have blunted crypto’s surge in the markets.

Bitcoin BTCUSD, -1.23% has risen 165% year to date and 25% in the past month, according to FactSet. Dogecoin DOGEUSD, -2.16% has gained nearly 35% on the Kraken exchange, while Avalanche AVAXUSD, +7.86% and Solana SOLUSD, +0.14% have gained 109% and 56%, respectively, over the past 30 days. The second-largest cryptocurrency by market capitalization, ether ETHUSD, -0.66%, is up 19% during the same period.

Any investors looking to cash out those gains, however, will have the IRS looking over their shoulder as the agency seeks to crack down on tax evasion related to crypto income, using new funding from the revenue-raising portion of the 2022 Inflation Reduction Act.

The IRS reported Monday that in 2023, the agency saw a “rise in digital asset tax investigations” aimed at closing the tax gap between what the public legally owes in taxes and what is collected.

The IRS said it is seeing increased incidents of unreported crypto income.

“These investigations consist of unreported income resulting from failure to report capital gains from the sale of cryptocurrency, income earned from mining cryptocurrency or income received in the form of cryptocurrency, such as wages, rental income, and gambling winnings,” the report reads.

The IRS has already begun hiring 7,000 new tax-enforcement personnel after Congress gave it tens of billions of dollars in new funding to crack down on tax evasion.

The agency has also put forward rules that would require digital-asset exchanges and crypto-payment processers to report information on users’ sales and exchanges. Those rules would go into effect in 2025.

The Biden administration doesn’t want to stop there.

In the wake of Hamas’s October attack on Israel, Deputy Treasury Secretary Wally Adeyemo sent a letter to Senate Banking Committee Chair Sherrod Brown, Democrat of Ohio, asking for expansions of the Bank Secrecy Act that would give the Treasury Department greater oversight of crypto exchanges and increased ability to sanction decentralized protocols.

Republicans like Rep. Tom Emmer of Minnesota, a crypto supporter, have thrown cold water on such proposals, saying they illustrate the Biden administration’s broader attitude toward the sector.

“They want to swallow this all up into the surveillance security state that they’ve created,” Emmer said at an industry event last week. “We just can’t let it happen.”