U.S. Digital Asset Strategy Needs A Stronger Tax Focus

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In the months and weeks leading up to the IRS’s filing deadline, an old narrative swiftly emerged: Some taxpayers are still largely in the dark on the proper tax treatment of digital assets and virtual currencies.

The IRS’s position is that virtual currencies are treated as property for tax purposes, but that blanket position fails to address various nuances. For example, how should passive income earned through cryptocurrency staking be treated? If a taxpayer uses virtual currency to purchase new and emerging digital assets like non-fungible tokens, including digital art stored in a blockchain, how are those transactions taxed,

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In the United States, where an estimated 16 percent Of adults invest in cryptocurrency, many investors are unaware of various tax return filing obligations that arise for virtual currency holders. For example, the majority of taxpayers in a survey commissioned by cryptocurrency compliance company CoinTracker said they didn’t realize they need to pay taxes when trading one type of cryptocurrency for another or when using cryptocurrency to buy a good or service.

Across the board, cryptocurrency insiders think the US digital asset sector needs increased regulation for the sake of investors and the economy. Ripple Labs CEO Brad Garlinghouse recently warned that the country must catch up with its peers on regulation if it wants to have a substantial impact on the sector.

“I think the US, way back in the late ’90s, provided that clarity and certainty as it related to the internet, the internet we use today, and it allowed the US to thrive and be a leader in how the internet grew,” Garlinghouse said. “I think that same opportunity exists today as it relates to blockchain and crypto, and so far the US has been a laggard when they could be a leader.”

The Biden administration thinks digital assets need more regulation too. On March 9 the White House issued Executive Order on Ensuring Responsible Development of Digital Assets to better regulate cryptocurrency. The government wants better control over a booming market – in November 2021 digital assets issued by private entities reached a combined market capitalization of $3 trillion, an explosive increase from just five years ago, when market capitalization was $14 billion.

Meanwhile, there’s little sign that the market for digital assets is slowing, and as more individuals enter the market, the White House wants to avoid digital assets creating undue risks for consumers and investors. It also wants to ensure that they don’t upend the integrity of the nation’s financial system or its national security, or enable crime and illegal finance, according to the executive order.

The executive order doesn’t explicitly mention taxation, but it does call on the US Treasury Department and several other government agencies to produce reports on digital assets, including the conditions that influence adoption of digital assets and the implications for the nation’s financial system and economic growth.

But regulation also requires clear and up-to-date tax rules, and the government needs to prioritize that in the digital asset space. There has been some headway: The Biden administration enacted legislation under the Infrastructure Investment and Jobs Act (PL 117-58) requiring cryptocurrency exchanges to issue Forms 1099-B detailing their customers’ gains and losses on crypto transactions.

Treasury is also considering that. In late March it released its revenue proposals for the 2023 fiscal year – the so-called green book – prioritizing modernizing reporting rules for digital assets. The department’s major goals include:

  • modernizing and expanding rules treating securities loans as tax-free to include other asset classes;
  • enabling some financial institutions and digital asset brokers to engage in information reporting for information exchange purposes;
  • requiring some taxpayers to report foreign digital asset accounts; and
  • amending mark-to-market rules for dealers and traders to include digital assets.

Treasury is concerned about the rapidly growing use of digital assets for tax evasion, and most of its goals address digital assets from that lens. But it also needs to address digital assets from a more transactional standpoint so that taxpayers have a better picture of their tax obligations for specific transactions.

As the Biden administration develops its strategy on digital assets, this key area deserves more attention and will strengthen the nation’s digital asset sector and tax transparency goals. By the time next year’s filing deadline rolls around, it’s hoped that US taxpayers will have more clarity on their cryptocurrency tax obligations.

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Credit: www.forbes.com /

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