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Crypto Exchanges Cut Off U.S. Clients, Creating Tax Challenges

Published
March 30, 2020
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    The U.S. may have one of the most vibrant tech industries in the world, but it's also home to some of the toughest financial regulations in the world. Cryptocurrencies stand at the center of these opposing forces with a promise to transform finance. The regulatory crackdown on cryptocurrencies over the past few years has led many exchanges to exit the U.S. market.

    Let's take a look at how some crypto exchanges are limiting exposure to the U.S. market and what that means for U.S. crypto traders.

    Exchanges Like Binance Limit Exposure

    Crypto exchanges have always been wary of U.S. regulators. In 2017, Bitfinex announced that it would discontinue service for existing U.S. customers, citing crypto-fiat banking challenges. Poloniex, Bittrex, Bancor and Binance followed suit by restricting their U.S. offerings, although the latter said it would create a U.S.-only exchange.

    Crypto Exchanges U.S.

    Top 25 Exchanges by Volume with No or Restricted U.S. Service - Source: CoinTelegraph

    OKEx, Huobi Global, LBank, HitBTC and other crypto exchanges have never permitted U.S. customers due to concerns over the regulatory environment. The limited competition paved the way for companies like Coinbase to build a dominant presence in the United States with smaller exchanges unable to handle the regulatory burden.

    Most of these crypto exchanges agree that the U.S. government is both too restrictive and too ambiguous when it comes to crypto regulations. Without regulatory clarity, it's easy to envision a scenario where a crypto exchange could inadvertently run amok of regulations and be subject to significant fines that could jeopardize their entire business.

    Impact on Tax Prep

    Customers that are cut off from their crypto exchange face several challenges when moving over to a new exchange or offline wallet. They must find a way to download their history of crypto transactions in order to calculate their capital gain or loss at the end of the year, as well as transfer any holdings to another exchange or offline wallet.

    On the tax front, crypto transactions are subject to the same tax treatment as conventional stock transactions. Traders must calculate their capital gain or loss for each transaction, aggregate them for the year and pay the correct tax on the total amount. The tax rate varies based on their income and the amount of time that they held the cryptocurrency.

    ZenLedger simplifies the process by automatically aggregating transactions from multiple crypto exchanges. You don't have to worry about combining transactions across accounts — even when using offline wallets. The capital gain or loss is automatically calculated and popular tax forms – like Form 1040 Schedule D — are pre-filled and available for download.

    In addition to these capabilities, ZenLedger makes it easy for traders to take advantage of tax loss harvesting opportunities that could reduce their tax burden each year. The platform identifies potential transactions with large unrealized losses that could be sold to realize the loss in the current tax year and replaced with a similar asset.

    Sign up for ZenLedger to get started for free!

    U.S. Making Progress On Crypto Tax Regulations

    The good news is that the U.S. government has been making progress when it comes to simplifying crypto tax regulations. In particular, the Cryptocurrency Act of 2020 could significantly improve the regulatory environment by clarifying which federal agencies would set the rules for different digital assets based on their purpose.

    The three types of crypto assets include:

    • Crypto-Currencies would be regulated by the Financial Crimes Enforcement Network (FinCEN) and the Comptroller of the Currency. These regulations would, in part, ensure that reserve-backed stablecoins are audited to verify that they're backed by a fiat currency.
    • Crypto-Commodities would be regulated by the Commodity Futures Trading Commission (CFTC). These commodities include any digital representation of a commodity, utility or contract on the blockchain network through tokens.
    • Crypto-Securities would be regulated by the U.S. Securities and Exchange Commission (SEC). These securities include all debt, equity and derivative instruments that rest on a blockchain or decentralized ledger based on the Howey's test.

    In addition, the Crypto Tax Fairness Act of 2020 seeks to introduce a de minimis exemption for cryptocurrency transactions under a certain threshold. The goal of the exemption is to simplify the tax burden for consumers that are using cryptocurrencies on a day-to-day basis rather than holding it as part of an investment portfolio.

    The greater clarity could draw more crypto exchanges into the market, while opening the door to a wider range of options for consumers, including both altcoins and initial coin offerings (ICOs). While these bills remain in the House, they enjoy bipartisan support that could help them reach the Senate floor in a timely manner.

    The Bottom Line

    The U.S. government has been slow to develop cryptocurrency regulations, which has led some crypto exchanges to limit their exposure to the U.S. market. While the government has made some progress over the past year, consumers are still facing the fallout from being forced to switch exchanges and/or aggregate transactions across multiple exchanges.

    The good news is that the situation is improving as numerous bills in Congress promise to add regulatory clarity. In the meantime, many regulatory agencies have been providing more guidance, including the Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC), which could further help the situation.

    ZenLedger makes it easy to aggregate transactions across multiple exchanges and automatically calculate your capital gain or loss at the end of the year. Get started today!

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