The Growing Regulation of Cryptocurrency
Cryptocurrency Regulation: A Growing Global Focus
Interest in cryptocurrency has skyrocketed over the past decade. Between 2018 and 2020 alone, the number of cryptocurrency users increased by over 66 million, highlighting its rapid adoption and growing importance in global financial systems.
While cryptocurrency offers value storage potential and privacy benefits, its growth has also prompted increased scrutiny, regulatory measures, and tax implications. Investors must stay informed about these developments to navigate the evolving landscape effectively.
Why Regulation Matters in Cryptocurrency
Cryptocurrencies are decentralized, meaning they are not backed by a central authority such as a government or financial institution. Their value depends entirely on what owners and investors ascribe to them. While this decentralization offers privacy and autonomy, it also leaves investors with limited legal recourse in case of disputes or issues related to crypto transactions.
U.S. Regulation of Cryptocurrency
Cryptocurrency regulation has been a growing priority for the American government:
- March 2022: President Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets, the first U.S. government framework addressing the risks and benefits of cryptocurrencies.
- August 2021: The U.S. Senate introduced a provision in the $1 trillion infrastructure bill requiring cryptocurrency brokers to report transactions to the Internal Revenue Service (IRS). This provision is expected to generate an estimated $28 billion in tax revenue over the next decade.
Tax Implications for Cryptocurrency Investors
The IRS classifies cryptocurrency as property, not currency. As a result, taxpayers must pay capital gains tax on profits derived from cryptocurrency transactions, regardless of whether the cryptocurrency was purchased in the United States or abroad.
Key Tax Reporting Requirements:
- The fair market value of cryptocurrency must be determined on each transaction date by converting the cryptocurrency value into U.S. dollars.
- Each transaction must be meticulously recorded, as cryptocurrency prices fluctuate by the minute.
Given the complexity of tracking and reporting cryptocurrency transactions, using a crypto tax software like CryptoTrader.Tax or Koinly can streamline the process. These tools generate IRS Form 8949, which reports sales and dispositions of capital assets and must be filed with a taxpayer’s federal tax return.
The Future of Cryptocurrency Regulation
In November 2021, digital assets surpassed a $3 trillion market cap, with surveys indicating that 16% of Americans have used cryptocurrency. Globally, over 100 countries are actively exploring or developing Central Bank Digital Currencies (CBDCs) to integrate digital assets into regulated financial systems.
As cryptocurrency continues to expand, so will its regulation. Governments and institutions worldwide are focused on addressing current deficiencies in the system rather than sidelining digital assets. For investors, it’s essential to stay informed about regulatory changes and tax obligations as the crypto landscape evolves.
Key Takeaways for Cryptocurrency Investors
- Understand the growing regulatory environment and its impact on crypto transactions.
- Keep detailed records of every cryptocurrency transaction to ensure IRS compliance.
- Utilize crypto tax software to simplify tax reporting for high-volume trading.
- Monitor developments in digital currency regulation to adapt to changing rules.
By staying informed, cryptocurrency users can take full advantage of the opportunities this innovative asset class offers while remaining compliant with emerging regulations.