US digital asset strategy needs to be more tax-focused

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

The position of the IRS is that virtual currencies are treated as property for tax purposes, but this general position does not take into account various nuances. For example, how do you deal with passive income generated from cryptocurrency staking? If a taxpayer uses virtual currency to purchase new and emerging digital assets like non-fungible tokens, including digital art stored on a blockchain, how are these transactions taxed?

In the United States, where a estimated at 16 percent of adults invest in cryptocurrency, many investors are unaware of the various tax reporting obligations that are imposed on holders of virtual currency. For example, the majority of taxpayers in a survey commissioned by cryptocurrency compliance firm CoinTracker said they were unaware that they had to pay taxes when exchanging one type of cryptocurrency for another or when using the cryptocurrency to buy a good or service.

Overall, cryptocurrency insiders believe that the U.S. digital asset industry needs increased regulation for the good of investors and the economy. Brad Garlinghouse, CEO of Ripple Labs recently notified that the country needs to catch up with its regulatory peers if it is to have a substantial impact on the sector.

“I think the United States in the late 1990s provided that clarity and certainty about the Internet, the Internet that we use today, and that allowed the United States to thrive and to be a leader in the growth of the Internet,” Garlinghouse said. “I think the same opportunity exists today when it comes to blockchain and crypto, and so far the US has been lagging when it could be a leader.”

The Biden administration thinks digital assets also need more regulation. On March 9, the White House released Executive Order on ensuring responsible development of digital assets to better regulate cryptocurrency. The government wants greater control in 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 the market cap was $14 billion.

Meanwhile, there are few signs that the digital asset market is slowing, and as more individuals enter the market, the White House wants to prevent digital assets from creating undue risks for people. consumers and investors. He also wants to make sure they don’t undermine the integrity of the country’s financial system or its national security, or enable crime and illicit finance, according to the executive order.

The executive order does not explicitly mention taxation, but it does call on the US Treasury Department and several other government agencies to produce reports on digital assets, including conditions that influence digital asset adoption and implications for the system. finance and economy of the country. growth.

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

The Treasury is also considering this. At the end of March, it published its revenue proposals for the 2023 financial year – the so-called green book – give priority to modernizing the rules for declaring digital assets. The main objectives of the department include:

  • modernize and expand the rules treating securities lending as tax-exempt to include other asset classes;
  • to allow certain financial institutions and digital asset dealers to engage in the communication of information for the purpose of information exchange;
  • requiring certain taxpayers to report foreign digital asset accounts; and
  • Amend mark-to-market valuation rules for dealers and traders to include digital assets.

The Treasury is concerned about the increasing use of digital assets for tax evasion purposes, and most of its objectives deal with digital assets from this angle. But it also needs to approach digital assets from a more transactional perspective so that taxpayers have a better idea of ​​their tax obligations for specific transactions.

As the Biden administration develops its digital asset strategy, 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 arrives, it is hoped that US taxpayers will have more clarity on their cryptocurrency tax obligations.

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