The Growing Regulation of Cryptocurrency

May 10th, 2022

Public interest in cryptocurrency has surged in the last decade. According to recent statistics, the number of people using cryptocurrency grew by more than 66 million between 2018 and 2020.

Proponents of cryptocurrency promote that the investment in cryptocurrency has tremendous potential when it comes to value storage, and many investor benefits relating to privacy. With the growth of cryptocurrency, there are also important notes to take regarding the increasing regulations and tax reporting implications resulting from such growth.

Further, cryptocurrencies are not backed by any centralized issuing authority, as the value of digital currencies is dependent entirely upon the value that other owners and investors ascribe to them. Without a central authority backing the value of a digital currency, investors may have limited legal recourse if any complications arise from their crypto transactions.

US Regulation of Cryptocurrency

Cryptocurrency has been on the radar of the American government for quite a while. In March of 2022, President Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets. This Executive Order is the first of its kind in that it outlines the first government approach to addressing the risks and benefits of cryptocurrencies.

In August of 2021, the U.S. Senate also included an important provision that imposed a reporting requirement on cryptocurrency brokers in the $1 trillion infrastructure bill. This provision was aimed at allowing the Internal Revenue Service (the “IRS”) to collect more tax, with estimates showing that $28 billion in tax revenue could be collected over 10 years related to cryptocurrency.

Tax Regulation Implications

Although some characterize cryptocurrencies as currency, the IRS views cryptocurrency as property. American taxpayers have to pay capital gains tax on their cryptocurrency profits, whether they bought the cryptocurrency from the United States or another country. The fair market value of cryptocurrency has to be determined on each transaction date by converting the cryptocurrency (being bought or sold) into U.S. dollars at each transaction.

Given that the price for every transaction has to be recorded, it can be quite rigorous for individuals to report their earnings from cryptocurrency, and for this reason, it is advised that users record the value of each transaction diligently since the value of various coins changes by the minute.  If a taxpayer is trading cryptocurrencies in large volumes, it would be beneficial for the taxpayer to utilize a crypto tax software program, such as CryptoTrader.Tax or Koinly.  Such software programs generate an IRS Form 8949, Sales and Other Dispositions of Capital Assets, required to be filed with the taxpayer’s federal tax return based upon the taxpayer’s cryptocurrency transactions.

Future Outlook of Cryptocurrency

In November of 2021, digital assets surpassed a $3 trillion market cap, with surveys showing that 16% of all Americans have made use of cryptocurrencies in the past years. At this point, there are over 100 countries that are either working or exploring setting up a Central Bank Digital Currency, similar to the United States. Regulation is bound to continue to increase in the months and years to come, with countries all over the world eager to tap into what promises to be a lucrative industry.

Given the latest trends, it is clear that governments and institutions are more intent on regulating and fixing current deficiencies, rather than putting crypto on the sidelines. For the consumer, it is imperative to be aware of its increasing regulations and tax implications as cryptocurrency continues to grow.