The market for cryptocurrencies has ballooned to an estimated $1.8 trillion. Cryptocurrencies are essentially lines of computer code that are digitally signed each time they travel from one holder to the next. Not tied to banks or governments, they allow users to send or receive money anonymously, which has appeal to international criminals, money launderers, drug dealers, and ransomware hackers.
The most widely traded cryptocurrency is Bitcoin, as of October 13, 2021 it is trading around $54,000 each, down from a high in April of about $64,800. It’s notoriously volatile, in some instances spiking or plunging on public pronouncements by Elon Musk, the provocative Tesla Inc. CEO. Some businesses now accept Bitcoin as payment. Other well-known cryptocurrencies include Ethereum, Dogecoin, Ripple, and Litecoin. All told, there are thousands. Bitcoin and others can be bought and sold on exchanges with U.S. dollars or other national currencies.
So where do government officials stand on the issue on both sides of the coin? Some lawmakers see cryptocurrency as a birth of technological innovation, especially in the development of blockchain, the digital ledger that records transactions. Top U.S. regulators, on the other hand, are flashing danger signs. Gary Gensler, the chairman of the Securities and Exchange Commission appointed by President Biden, said last week that investors need more protection in the cryptocurrency market, which he called “the Wild West.” While the SEC has won dozens of cases against crypto fraudsters, Gensler said the agency needs more authority from Congress — and more funding — to regulate the market.
The Federal Reserve, meanwhile, is considering developing its own digital currency pegged to the U.S. dollar. A so-called digital dollar could enable faster payments among banks, consumers, and businesses.
In August, the Senate passed, with overwhelming bipartisan support, a $1 trillion infrastructure bill to rebuild the nation’s deteriorating roads and bridges, expand high-speed internet access, and improve airports and railways. Before this bill becomes law, it will need to pass the house as well; however, it is the language inside the bill that is interesting as it pertains directly to the digital currency landscape.
To partially fund this, Congress is imposing tax-reporting requirements for cryptocurrency brokers, much like the way your stockbroker, investment custodian, broker, or investment advisor would report their customers’ sales to the IRS.
For example, if you own shares of ABC Company stock and sell your shares, the price you originally purchased the stock as well as the gross proceeds when you sell are automatically reported to the IRS by the different brokerage firms and clearinghouses. The provisions of this bill are pushing to require third-party reporting for cryptocurrencies – reporting that does not exist today in the space.
This is the first step in tighter regulation of cryptocurrencies, something the Biden administration has been pushing for tax compliance purposes. The plan would raise $28 billion in revenue over the next 10 years by estimates. This isn’t going to be the last time the crypto world will have to worry about Congress and taxes. There will still be plenty of concerns about tax compliance, and some lawmakers said the debate over the definition of brokers showed them how much other work still needs to be done in this area.
What’s more, the Democrats will be hungry for cash to pay for their next big spending package. Some were heartened by the Joint Committee on Taxation’s $28 billion revenue-raising estimates for the reporting requirements, taking it as a sign there is a lot more money to be had in this area.
One issue that’s on the administration’s radar: wash-sale rules, and the lack thereof with cryptocurrencies. When people trade stocks, there’s a long-standing rule restricting their ability to use losses to offset gains when they buy and sell the same stock within 30 days. That’s designed to prevent people from manufacturing losses to cut down their tax bills. There’s no such rule with cryptocurrencies, though, and a senior administration official says it is now thinking through how to go about changing that.
The crypto market is evolving rapidly and there is still a lot that needs to be figured out when it pertains to cryptocurrencies. Not only does U.S. law affect the market, but international law affects the price and outlook of these digital currencies as well. Cryptocurrencies are extremely volatile and are only suitable, if at all, for the most aggressive investors.