President Biden is taking office at an unprecedented time for cryptocurrencies. With about one in five Americans holding them, the global market capitalization for cryptocurrencies stands at roughly a trillion dollars, according to CoinMarketCap. The market could further expand with the launch of crypto securities like exchange-traded funds (ETFs).
As cryptocurrencies have grown in value and popularity, the IRS, SEC and other agencies have taken a growing interest in regulating them. The IRS has had a heavy hand in enforcing crypto tax evasion and the SEC has cracked down on unregistered securities. The big question for crypto users, investors and traders now is: Where does the Biden administration stand?
Let’s take a closer look at where the Biden administration stands on cryptocurrencies and what it means for your portfolio.
A Brief History of Crypto Regulation
Crypto regulations have evolved over the past several years.
The IRS published Notice 2014-21 in April 2014 to clarify how existing tax principles apply to virtual currency transactions. Later that year, Treasury Decision TD-9706 solicited comments on the proper reporting of virtual currency as Specified Foreign Financial Assets on Form 8938. These events signaled the beginning of crypto regulations and enforcement.
In 2018 and 2019, the IRS began sending “educational” letters to tens of thousands of taxpayers that were identified through various IRS compliance efforts as having suspected virtual currency transactions. The SEC also began cracking down on unregistered initial coin offerings (ICOs) and accelerating its prosecution of crypto abuses (e.g., pyramid schemes).
Last year, the IRS expanded its efforts to crack down on tax evasion by introducing a new question on Form 1040, sending more educational letters and reaching out to crypto firms to help with investigations and uncover privacy coins. The SEC also charged Ripple—one of the largest cryptocurrencies—and two executives with selling unregistered securities.
President Biden’s Personal Stance
President Biden has a somewhat nuanced stance on cryptocurrencies.
In 1994, as a Senator from Delaware, he introduced the Communications Assistance for Law Enforcement Act (CALEA) to require telecom carriers and manufacturers to design equipment and services to ensure that they were accessible to surveillance by law enforcement. The bill eventually inspired Phil Zimmerman to launch Pretty Good Privacy (PGP), an encryption service.
Despite Biden’s mixed record on encryption and privacy, he has been generally supportive of “technology and innovation” throughout his career. In fact, a political action committee (PAC) campaigning for his 2016 presidential bid famously accepted Bitcoin donations. President Obama and other Democrats have also been generally supportive of cryptocurrencies.
Crypto-Friendly Advisors at the Helm
President Biden’s early advisors appear supportive of cryptocurrencies.
In November, Biden appointed former Commodity Futures Trading Commission (CFTC) Chairman, Gary Gensler, to lead the agency review team for the Federal Reserve, banking and securities regulators. In addition to serving under Obama and Clinton, Gensler has recently proven to be supportive of cryptocurrencies and blockchain technologies.
In recent Congressional testimony, Gensler pushed back against comparisons between cryptocurrencies and Ponzi schemes and suggested that Facebook’s Libra met the requirements of being a security under U.S. law. Gensler also authored an op-ed for CoinDesk that called blockchain technology a catalyst for change in the financial sector.
Treasury Position Remains Uncertain
President Biden’s pick for Treasury Secretary, Janet Yellen, has mixed opinions.
In 2018, Yellen called Bitcoin a “highly speculative asset” and “not a stable source of value” at the 2018 Canada FinTech Forum in Montreal. She has also underscored concerns that anonymous digital versions of cash could have enormous implications with regard to terrorist financing, money laundering and other financial crimes.
Despite these concerns, Yellen is not opposed to cryptocurrencies and blockchain technology. She has said that blockchain is a tremendous new technology that could have implications for the way transactions are handled while adding that monetary regulators should permit blockchain and cryptocurrency initiatives to expand.
Changes with Taxation and the IRS
President Biden will likely leave the IRS alone but could raise taxes.
The IRS has been notoriously heavy-handed during the Trump administration. In addition to sending out rounds of warning letters, the agency began hiring crypto tax experts to help trace transactions across the blockchain and support investigations. It also added new questions for Form 1040 that force taxpayers to disclose crypto holdings.
While IRS enforcement will likely remain the same, the Biden administration could increase capital gains taxes that are widely viewed as a way to tax the rich. The Biden administration may also pursue other forms of taxation of digital goods and services given the widespread criticism surrounding Big Tech and e-commerce giants.
Bipartisan Bills Could Make Progress
President Biden could reduce uncertainty in the market.
There is a growing backlog of bipartisan bills in Congress designed to support cryptocurrencies, including the exclusion of small transactions from taxes and setting regulatory boundaries for agencies and addressing crypto tax ambiguities. Biden’s reputation as a dealmaker could push some of these regulations into law and reduce uncertainty in the market.
In addition to cryptocurrencies, the Biden administration could direct the SEC to clarify its rules surrounding crypto security offerings and decentralized finance (DeFi). These are growing areas of interest where there is a lot of legal ambiguity and a patchwork of regulations that weren’t designed to apply to virtual assets or cryptocurrencies.
The Bottom Line
President Biden may have a mixed track record when it comes to encryption and privacy issues, but he has been generally supportive of technology and innovation. While the industry can expect a heavy hand in terms of prosecuting crime, the administration could have a favorable impact in advancing legitimate uses for cryptocurrencies and blockchain technologies.
If you’re a cryptocurrency user, investor or trader, ZenLedger can help you track your capital gains and losses to ensure that you don’t overpay, as well as help you identify ways to reduce taxes through tax loss harvesting.