The cryptocurrency market has been largely unregulated since its inception circa 2008. While the IRS and SEC have addressed a handful of issues, enforcement actions have been limited to high profile individuals or companies. The market could be due for some big changes, however, as the IRS, Congressional leaders and international watchdogs are getting set to introduce new regulations.
Let's take a look at some of these upcoming rules and explore how they could impact the cryptocurrency market.
Upcoming IRS Crypto Rules
The IRS treats cryptocurrencies as investment property — similar to a stock or bond — meaning that they're subject to capital gains taxes. Under the IRS’ 2014 guidance, users must record each transaction and compute the aggregate capital gain or loss each year for tax purposes. These requirements make cryptocurrency impractical for consumer transactions, while creating a lot of ambiguity around cost basis calculations and so-called forks.
In April, a bipartisan group of 20 lawmakers urged the IRS to issue more guidance on the tax concerns and basic reporting requirements for cryptocurrency users. The group specifically requested clarification about how to calculate and allocate cost basis, as well as how to treat forks that provide cryptocurrency users with "free" coins. However, they were quick to note that these weren’t the only ambiguities impacting the crypto market.
"There are many other open questions about the federal taxation of virtual currencies, but we feel that there is particular urgency in resolving the ambiguity around basic questions of how taxpayers should calculate and track the basis of their virtual currency holdings," said the group of lawmakers. "It is not reasonable to expect taxpayers to satisfactorily answer these complex questions while the IRS remains silent."
The IRS responded to the letter with a promise to issue additional guidance on cryptocurrency taxation. While no timeline was given for the new guidance, experts believe that it will be issued before the 2019 tax season. But at the same time, the agency continued to send out letters to taxpayers warning them to pay any back taxes or amend their returns. The move suggests that the IRS is sticking with its investment property classification.
"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS Commissioner Chuck Rettig in a statement. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand how to meet their obligations."
The stepped up enforcement and upcoming guidance from the IRS means that cryptocurrency users should exercise caution.ZenLedger makes it easy to import cryptocurrency transactions across multiple exchanges and automatically calculate capital gains and losses, as well as autofill popular IRS forms like Form 1040 Schedule D and Form 8949. Sign up today!
Crypto Bills in Congress
The uncertainty surrounding the taxation of cryptocurrencies has prompted Congress to attempt to resolve some of the legal issues on their own, especially following Facebook's move to launch the Libra payment network. While the IRS has the power to enforce existing laws, Congress has the power to enact new laws that could govern the treatment of cryptocurrencies.
Japan and Switzerland have already introduced their own legal frameworks, which has attracted new cryptocurrency projects and investments from around the world. In fact, Facebook chose to incorporate the group that will govern Libra in Switzerland despite being based in the United States. Some lawmakers are concerned they're behind the curve in supporting innovation.
Congress has introduced at least three bills that would resolve some of the legal ambiguities surrounding cryptocurrencies.The bipartisan Token Taxonomy Act of 2019 would exempt digital tokens that are used as a medium of exchange from being defined as securities. In particular, the bill would create a $600 de minimus exemption for gains from the sale or exchange of cryptocurrencies, expand like-kind exchanges under section 1031 and clarify that an IRA may hold cryptocurrency.
The Blockchain Regulatory Certainty Act would exempt non financial businesses using blockchain from being defined as money transmitters. In particular, blockchain developers and service providers that don't take control of consumer funds would be exempt from certain financial reporting and licensing requirements that they are subject to now.
The bipartisan Blockchain Promotion Act would direct the Department of Commerce to come up with a standard definition for blockchain technology. The goal would be to further understand the potential applications for blockchain and explore opportunities for its use within the federal government, as well as prevent a patchwork of state blockchain definitions.
International Crypto Regulations
Due to their pseudo-anonymity, many governments are skeptical that cryptocurrencies could help criminals evade law enforcement and effectively launder money.
The Financial Action Task Force on Money Laundering, known as FATF, recently introduced new rules that would require cryptocurrency businesses in about 200 countries to verify the identities of anyone sending or receiving more than $1,000 worth of digital assets. Under the new rules, countries will have under June 2020 to adopt the new guidelines.
The information required for each transfer would include:
- The originator's name.
- The originator's account number (wallet).
- The originator's physical address, national ID number or customer ID number that uniquely identifies the originator to the ordering institution or date and place of birth
- The beneficiary's name.
- The beneficiary's account number (wallet).
Many U.S. firms have discussed the viability of a "global parallel system" that would enable the world's cryptocurrency exchanges to share data and remain compliant with these new regulations. Like airline miles or store-issued prepaid cards, these parallel systems would ensure that individual users could be held liable for their actions through detailed recording.
Critics argue that the new regulations would be onerous, if not impossible to implement, harmful to the privacy of users and counterproductive to law enforcement goals. For example, the move could push the public out of controlled platforms and onto difficult-to-track exchanges, or push entire platforms off-the-grid.
The Bottom Line
The cryptocurrency market has been the Wild West since its inception in 2008, but that's starting to change with new IRS guidance, bills in Congress and international rules coming into effect. These regulatory changes could have a big impact on the market — and both investors and consumers should take note. In the meantime, ZenLedger makes it easy to remain compliant with the IRS’ 2014 guidance and ensure that your books are in order.