As part of the bipartisan Infrastructure Bill, the U.S. Senate aims to put new regulations in place that require cryptocurrency brokers to report purchase and sale prices. “Brokers” would be required to report purchases, sales, transfers between brokers, and transactions over $10,000, making it easier for the IRS to track profits. The Joint Committee on Taxation estimates that these changes to IRS reporting would raise some $28 billion over the next 10 years.
Since bitcoin’s birth in 2009, few regulations have been applied to the industry. As the Financial Times reports, crypto is hard to regulate because it’s hard to define. While cryptos are seen by the public as currency not attached to a specific country, U.S. regulators see bitcoin as a commodity and other cryptos as securities. But regulatory confusion hasn’t affected crypto’s popularity.
A recent survey by the University of Chicago found that 13% of Americans bought or traded cryptocurrency in the last year, 61% of those in the last six months. And the demographics are interesting too; the average crypto trader is 38 years old (mean) and does not have a college education (55%). Further, 41% are women, 44% are people of colour, and around 35% have household incomes of under US$60,000.
Crypto is seen as an easy investment – easier than the stock markets – though there doesn’t seem to be much understanding about the market itself. 62% of those surveyed by the University of Chicago said they aren’t investing in crypto because they don’t understand it enough. There have always been concerns about what should be reported to the IRS, and confusion over how to report it.
Crypto trades are subject to income tax on gains in the U.S., though all that’s currently required for reporting crypto transactions is to tick a box on the first page of your tax return, and a separate specific form if you have over a specific number/value of transactions.
Investors are supposed to pay taxes on any increase in value of the crypto they spend – but, without determining the asset’s starting value, investors can’t easily determine the taxable profit. And many investors don’t realise that day-to-day crypto transactions can be taxable, such as converting bitcoin to cash, so you can pay for a pizza or withdraw from a cash machine.
There are pushbacks on the proposed tax regulation from crypto-industry groups. The language of the current bill states a broker is defined as “any person who (for consideration) regularly provides any service responsible for effectuating transfers of digital assets, including any decentralized exchange or peer-to-peer marketplace”. This would encompass not only regulated brokers but almost anyone who trades – including miners and validators. Industry groups are pushing for clarity and narrowing of the focus.
Many investors are happy that, more than a decade after its launch, the crypto-market is finally receiving some real rules on reporting – even if it means a higher tax return. And it’s expected that these efforts to regulate will further legitimise cryptocurrencies, strengthening the market in the process.
And more crypto-related regulations are looking to be added to the Biden administration budget plan. These include a ‘global data’ caveat – requiring U.S.-operating crypto businesses to report information on foreign account holders, “so that the U.S. can share information with global trading partners”. According to the U.S. Treasury’s Greenbook, “In order to ensure that the United States is able to benefit from a global automatic exchange of information framework with respect to offshore crypto assets and receive information about U.S. beneficial owners it is essential that United States reciprocally provide information on foreign beneficial owners of certain entities transacting in crypto assets with U.S. brokers.”
Mondaq reports that, as at March 2021, cryptocurrencies have been legislated and regulated in eleven countries and banned in ten. More than a decade after its launch, earlier this year the cryptocurrency industry was valued at $2 trillion.
Local Knowledge – International Coverage
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