Cryptocurrencies are trending. In the USA, the market is hardly regulated, but that about to change. The tax and financial authorities should be given the tools to better track the use and trading of virtual money.
On 9 March 2022, US President Joseph Biden signed an executive order that directs the US federal government to come up with plans to regulate cryptocurrencies. Coordinating the efforts of US financial and tax authorities in their attempts to establish tax laws and financial reporting standards regulating the use and treatment of digital assets presents an enormous challenge.
The status of cryptocurrency regulation
The evolving use of cryptocurrency and other forms of digital assets in global financial markets has proceeded at a staggering pace. The rapidly innovating cryptocurrency industry has created significant legitimate investment opportunities, while also enabling illicit activity that has thrived in the current environment of light regulation. For example, US tax guidance has been limited to a 2014 IRS Notice and related questions and answers, treating cryptocurrency as “property”. Under this limited guidance, well-intentioned crypto investors and users have been challenged to comply with the absence of guiding regulations. Tax and financial regulators will struggle to recover lost ground from those more experienced in the use of digital assets, explain the Ecovis experts.
he appalling events in Ukraine and the economic pressures imposed against Russia raise yet another concern. The US, EU and UK governments are seeking to control the potential use of cryptocurrency and digital assets to facilitate the evasion of sanctions limiting transfers of cash and assets. Regulating the crypto industry will contribute to the policing of these sanctions.
Which regulations already apply?
President Biden’s executive order builds on the November 2021 bipartisan infrastructure legislation, which lays out a national policy for digital assets across six areas: consumer and investor protection, financial stability, illicit finance, US leadership in the global financial system and economic competitiveness, financial inclusion, and responsible innovation. US tax rules prior to the recent legislation had already created the need for extensive recordkeeping requirements for crypto exchanges, to account for gains and losses from digital asset transactions.
The new regulatory provisions are expected to provide tax authorities and financial regulators with additional tools to track the use of cryptocurrency. Global regulation of cryptocurrency will have a further impact on the valuation of the various forms of digital assets, as the markets will need to price exposure and potential costs associated with the regulation.
The article was prepared by Douglas Nakajima, J.D., LL.M, Co-leader, International Tax Services, Marcum LLP, [email protected], www.marcumllp.com
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