The crypto industry has experienced a lot of growing pains throughout its short history, ranging from high-profile security breaches to initial coin offering (ICO) pyramid schemes. While these problems come with the territory to some extent, the industry’s greatest source of frustration has been the lack of regulatory clarity and inconsistent enforcement actions.
Let’s take a look at what lawmakers are doing to improve crypto and how federal agencies are cracking down without clear laws in place.
Lawmakers Push for More Clarity on Crypto
The crypto industry has faced a lot of regulatory uncertainty. Rather than providing clarity, legislators have remained largely silent thus far and the resulting ‘regulation by enforcement’ has disenfranchised both entrepreneurs and investors. A growing chorus of lawmakers are concerned that the disenfranchisement could leave the U.S. behind in innovation.
There are two recent bills that aim to provide clarity and clean up the mess:
- Securities Clarity Act: Congressman Tom Emmer (R-NC) introduced the Securities Clarity Act to eliminate ambiguity regarding ‘security’ classification. The act states that an asset sold pursuant to an investment contract that is not otherwise a security under the Securities Act does not become a security as the result of being bought or sold. In practice, the act would exempt crypto transactions from securities laws.
- Digital Commodity Exchange Act: The Digital Commodity Exchange Act would address the patchwork of regulations surrounding crypto assets by putting all crypto exchanges under the purview of the Commodity Futures Trading Commission (CFTC), which would preempt state crypto laws. The move would make it much easier to govern crypto assets but could experience pushback from New York and Wyoming.
These bills are the latest in a long line of legislation aimed at providing greater transparency in how crypto assets are treated. Prior to the COVID-19 pandemic, there were a number of crypto bills introduced in the House and Senate that sought to do everything from define what federal agencies regulated what crypto assets to specifying that transactions wouldn’t be taxed.
Legislatures have also pushed the Internal Revenue Service (IRS) on multiple occasions to clarify ambiguous positions on crypto taxation. The Blockchain Caucus recently sent a letter to the IRS asking for guidance on the taxation of block rewards in a proof of stake network. These efforts aim to improve documentation for tax professionals and individual taxpayers.
Federal Agencies Step Up Enforcement
Lawmakers may be trying to improve regulatory clarity, but prosecutors have only become more aggressive. Attorney General William Barr recently published guidelines in a memo titled, Cryptocurrency: An Enforceable Framework, to guide prosecutors nationwide following the Department of Justice (DOJ) and CFTC’s actions against BitMEX.
The report asserted U.S. jurisdiction over individuals whose crypto transactions interact with U.S.-based servers and specifically mentioned that Zcash, Monero, and DASH usage is indicative of possible criminal behavior. While the goal is to curb the use of crypto to pay for illicit goods and services, the move could also discourage privacy innovations.
Excerpt from IRS Warning Letters - Source: IRS
In addition to the DOJ, several other federal agencies have stepped up enforcement:
- IRS: The IRS has sent tens of thousands of notices to taxpayers and introduced a new tax form in 2020 to root out taxpayers that aren’t declaring their crypto assets and paying capital gains taxes on any increase in value. In addition, the agency recently sought to hire blockchain experts, likely in an effort to find potential tax evaders.
- SEC: The SEC continues to crack down on initial coin offerings (ICOs) and other investment-related activities that it deems criminal. While its goal is to protect investors, these efforts could result in fewer entrepreneurs willing to assume the risk of legitimate activity in fear of prosecutions.
Many of these enforcement efforts are well-intentioned, but without regulatory clarity, they can have a chilling effect on entrepreneurs and investors in the space. That said, these enforcement efforts will likely continue until lawmakers add clarity by defining what taxpayers owe, what counts as a security, and answering other questions.
What It Means for You
Crypto traders and investors have been dealing with regulatory ambiguity for years. While the IRS has issued some guidance and lawmakers are pursuing changes, there are some steps that individuals can take to lower their risk and avoid any run-ins with the law.
Twitter Hack Pushes a Common Crypto Scam - Source: Twitter
Some best practices to reduce your risk include:
- File Accurate Taxes: Crypto traders and investors should ensure that they accurately report transactions each year to the IRS. Fortunately, ZenLedger can simplify the process by aggregating transactions across exchanges, calculating capital gains or losses, and even pre-filling popular tax forms for your accountant.
- Be Wary of Scams: Crypto remains a relatively unregulated market that’s subject to a lot of regulatory oversight. By being aware of potential scams, traders and investors can avoid assets that end up subject to regulatory concerns and minimize their chances of losing money to either fraud or regulatory actions.
- Consult an Expert: Individuals that aren’t sure about the legal consequences of a particular action should consult an expert to provide an opinion. If you aren’t sure about the legitimacy of a particular crypto project, consult a financial advisor or crypto expert for a second opinion to avoid fraud.
The Bottom Line
The crypto industry operates under a patchwork of legislation that creates a lot of ambiguity for traders, investors, and entrepreneurs. While lawmakers work to provide more clarity, traders and investors should ensure that they accurately calculate what they owe the IRS, remain wary of scams, and consult experts when they need help.
If you’re looking for ways to reduce your tax liability, ZenLedger can help find tax-loss harvesting opportunities at any point during the year.