The Crypto-Nightmare: Should We Be Taxing Cryptocurrency?

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Thursday, November 18, 2021

Should cryptocurrency be taxed and if so, what are the challenges to reporting digital assets?

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The Crypto-Nightmare: Should We Be Taxing Cryptocurrency?

The question of whether we should be taxing cryptocurrency can easily be turned on its head to ask why we shouldn’t. After all, similar financial assets are reported to the Internal Revenue Service (IRS), so surely brokers and holders should be required to do the same.

It’s an issue that’s currently being debated by US lawmakers, as it's included in the infrastructure bill making its way through Congress. While the White House has called for the so-called tax gap to be closed, taxing cryptocurrency is proving to be surprisingly controversial.

A potential $28 billion for the US Treasury

Taxing large cryptocurrency transfers could result in an extra $28 billion for the US Treasury, which would go a long way to financing the Biden administration’s ambitious $1 trillion infrastructure package. The money would be invested into transport systems, including rebuilding roads and the rail network, as well as communication support, such as broadband.

Disputes over reporting requirements

The debate about whether the taxes should be levied and how is more complex than a simple issue of lawmakers against traders. Disputes over the details of reporting requirements and the language used crossed party lines, holding up the passage of the bill. Despite this, it has progressed without any amendments.

This is seen as a blow for the cryptocurrency community, which was keen to fix the language used and exclude tax reporting requirements to wallet developers and miners. It’s now unlikely that any changes will be put in place before the bill has passed, but the US Treasury has hinted it would be open to providing exemptions to firms that don’t operate as brokers.

These details won’t manifest the wide-reaching adjustments that many cryptocurrency advocates wanted, but they could impact the tax bills of some in the industry going forward. Not having the US government’s assurances baked into the bill means future administrations could interpret the bill in a different fashion.

Will regulations push cryptocurrency transactions underground?

Some national security officials have raised concerns that the language in the bill will mean more cryptocurrency transactions will be performed underground. Jeremy Sheridan, US Secret Service investigations office assistant director, told the Wall Street Journal that increased regulation could “push illicit use and criminal actors deeper into anonymizing methods and corners of the internet that would make it more difficult for law enforcement”.

How has cryptocurrency avoided tax up until now?

Like many areas of the digital world, cryptocurrency has emerged after the rules were written that should govern it. When the rules for calculating tax were devised, digital assets simply didn’t exist, and so aren’t included on the standard 1099 form used by brokers and their clients to establish taxable gains, which are then checked by the IRS to verify tax returns.

Of course, cryptocurrency trading is a complex issue that usually occurs without brokers being involved. Trading happens across multiple venues, including exchanges, digital wallets and automated protocols, which makes it hard to keep track of. Investors don’t always have a clear view of gains and losses, which means the IRS will also have a difficult task when it comes to governance.

Global taxation of cryptocurrency

The US isn’t the only country that has had to grapple with the issues of taxing cryptocurrency and how it’s governed. In the UK, for example, capital gains tax is levied on any profits made from crypto assets, unless they fall within the £12,300 tax-free allowance. Cryptocurrency is therefore only taxed when it’s sold and the government relies on the profit being recorded in a self-assessment tax return.

Other nations have fairly nuanced rules surrounding cryptocurrency, which range from the likes of Germany stipulating bitcoin isn’t a currency to Singapore taxing businesses for any crypto profit they make.

No matter what an individual country’s stance is on taxing cryptocurrency, the same issues around reporting requirements and how they’re enforced apply. Once the US infrastructure bill comes into play and the Treasury has published the guidelines it’s promised, it’ll be interesting to see how teething problems are dealt with and whether other countries decide to change their rules surrounding the taxation of cryptocurrency.

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