A Tax be Upon Your Cryptocurrencies

Nothing legitimizes an asset class quite like a tax.

During Prohibition, state and federal governments were deprived of billions of dollars of tax revenue as the sale and consumption of alcohol was banned across the United States and lawmakers don’t want to make that same mistake with cryptocurrencies.

With the U.S. weighed down by its massive debt burden, exacerbated by pandemic stimulus, it appears willing to rifle through the couch cushions for tax revenue, even if it comes from cryptocurrencies.

New rules, added at the eleventh hour to a US$550 billion bipartisan infrastructure package that is now sitting before the U.S. Senate, would force businesses to disclose trades of cryptocurrencies in excess of US$10,000.

The new provisions are designed to raise an estimated US$28 billion in additional tax revenues and add to increased scrutiny the Inland Revenue Service has recently applied to cryptocurrency traders.

For the most part, many cryptocurrency investors in the U.S. have been ignoring their tax obligations, which would otherwise require them to pay income taxes on any gains, but even those who wanted to pay tax, struggled with a tax system that has lagged the development of the digital asset class.

Filing taxes on cryptocurrency trading can create huge headaches, especially for traders who conducted multiple transactions each year.

Part of the problem is that tax regulations are inconsistent – while traditional stock brokerages are required to send detailed tax forms to clients, cryptocurrency exchanges, at least those that are regulated, are not.

And even if cryptocurrency exchanges wanted to help their clients file taxes, it’s not always clear how that could be done under current regulations.

For years, the IRS has been warning taxpayers to report cryptocurrency transactions on their tax returns, and recently, the agency made clear that fighting tax evasion through cryptocurrencies was a top priority.

If so, the IRS will have its work cut out for it.

Despite regulatory crackdowns, unregulated exchanges like Binance continue to soak up the bulk of overseas volume and U.S. investors are able to access these exchanges using VPNs where needed.

The difficulty for U.S. cryptocurrency investors looking to avoid tax typically occurs when they want to swap out their digital assets for fiat currency, but as more options and means to spend cryptocurrencies increase, this becomes a possible way for tax authorities to better monitor these flows.

As more payment service providers such as PayPal (-2.70%) move to facilitate payment using cryptocurrencies, it becomes easier for tax authorities to track such spending and assess if these crypto spenders are under-declaring their taxable income.

The irony is that as cryptocurrencies gain mainstream acceptance, they become easier to trace and tax, which for the longest time had been their biggest party trick.