Cryptocurrency: It’s Mysterious, Volatile, and All Over the News
At the start of 2017, one Bitcoin—the most well-known cryptocurrency—was valued at approximately $800. By the close of that same year, one Bitcoin approached $20,000. Cryptocurrency is so mercurial that taxing and regulating bodies are just now starting to take a closer look.
The Internal Revenue Service (IRS) has issued basic guidance stating that it considers virtual currencies to be property. IRS Notice 2014-21, 2014-16 IRB 938, 03/25/2014, IRC Sec(s). 1001 addresses the sale or exchange of convertible virtual currency and its use in economic transactions. The currency must be included in computing the gross income of each transaction. The amount of such income is the fair market value (FMV) of the virtual currency as of the date that the virtual currency was received.
Public exchanges do have a record of their users and their wallets, but no Form 1099s are being distributed. The IRS has said that anyone who uses virtual currency as a form of payment must issue a 1099 when the gross amount exceeds the reporting thresholds.
The IRS has recently been looking at individual tax returns for unreported gains from virtual currencies and recently won a court battle when it issued a John Doe summons for all account holders’ information with transactions over $20,000 on Coinbase from 2013 to 2015. Under the Tax Cuts and Jobs Act, the IRS addressed like-kind exchanges limiting the exchange only to real property that is not held primarily for sale. As such, cryptocurrencies can no longer be exchanged for other like-kind property—so trading one cryptocurrency for another is no longer a tax-free exchange.
If cryptocurrency use increases and becomes more mainstream, regulating bodies are sure to play a greater role. That makes this one more area to check for tax risk exposure.
The Evolving Landscape of Cryptocurrency Regulation
As cryptocurrencies gain more mainstream attention, governments around the world are grappling with how to regulate these digital assets. The decentralized and often anonymous nature of cryptocurrencies poses significant challenges for regulators, who must balance innovation with consumer protection and anti-money laundering efforts.
Global Regulatory Approaches
Different countries have taken varied approaches to cryptocurrency regulation. For example, Japan has recognized Bitcoin as a legal form of payment, while China has banned initial coin offerings (ICOs) and shut down local cryptocurrency exchanges. In the European Union, regulations are being developed to bring more oversight to the market, focusing on transparency and security.
Impact on Investors and Businesses
For investors and businesses, the regulatory landscape can significantly impact operations and profitability. Businesses accepting cryptocurrency must navigate the complexities of tax reporting and compliance. Investors, on the other hand, need to be aware of the potential tax implications of their trades and holdings.
Tax Reporting Requirements
In the United States, the IRS requires taxpayers to report any gains or losses from cryptocurrency transactions. Failure to do so can result in penalties and interest. Taxpayers must also be aware of the implications of using cryptocurrency for purchases, as these transactions are considered taxable events.
Future Trends and Considerations
As the use of cryptocurrencies continues to grow, several trends are emerging:
- Increased Regulation: Expect more comprehensive regulations to be implemented globally, aiming to prevent fraud, protect investors, and ensure tax compliance.
- Technological Advancements: Blockchain technology, which underpins most cryptocurrencies, is continually evolving. These advancements may lead to new regulatory challenges and opportunities.
- Adoption by Mainstream Institutions: Major financial institutions are beginning to explore and integrate cryptocurrencies into their offerings. This trend could lead to greater stability and acceptance of digital currencies.
- Environmental Concerns: The energy consumption associated with cryptocurrency mining has drawn criticism. Future regulations may address the environmental impact of these activities.
Conclusion
Cryptocurrency remains a dynamic and rapidly evolving field. As regulatory frameworks develop and the market matures, both opportunities and challenges will arise. For individuals and businesses involved in the cryptocurrency space, staying informed about regulatory changes and their implications is crucial. Whether you are an investor, a business owner, or simply interested in the future of digital currencies, understanding the regulatory landscape will help you navigate this exciting and complex domain.
