"Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion," the Treasury said in a press release.
"Within the context of the new financial account reporting regime, cryptocurrencies and cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies would be covered. Further, as with cash transactions, businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported on."
A growing number of Wall Street analysts have sounded the alarm that regulators at the Treasury and the Securities and Exchange Commission (SEC) could soon take a more active role in cryptocurrency regulation. (Related: Cryptocurrency scam hits hundreds of small investors.)
Increased regulation will likely upset some cryptocurrency investors, who have seen the value of bitcoin slide about 25 percent over the past month and talk of capitulation creep into online forums.
With longtime cryptocurrency expert Gary Gensler at the head of the SEC, financial services firm Raymond James expects it's only a matter of time until Congress grants the regulator broader jurisdiction. Gensler told lawmakers earlier this month that allowing the SEC to regulate cryptocurrency exchanges will help ensure investors are protected and prevent market manipulation.
"In the short-term, regulation could cause headline risk," Raymond James analyst Ed Mills wrote earlier this month. "However, in the medium-to-long term, regulation would add further legitimacy to the asset class and could provide a regulatory moat around existing cryptocurrency exchanges."
According to Mills, "Chairman Gensler is viewed as a potential ally of cryptocurrencies as a former professor on the topic."
At his nomination hearing before the Senate Banking Committee, Gensler said: "Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion. But they've also raised new issues of investor protection that we still need to attend to."
He added that "it's important for the SEC to provide guidance and clarity."
The SEC is currently embroiled in a legal battle with San Francisco-based Ripple Labs, a blockchain payment platform, over its alleged unlawful sale of XRP tokens worth over $1.38 billion. The outcome of the SEC's lawsuit against Ripple and the determination of XRP's status are being closely watched by industry leaders and investors alike for its potentially far-reaching implications for the cryptocurrency industry.
The early crypto scene was dominated by those seeking to evade or defeat regulation. But now, a substantial number of players in the crypto industry have been seeking more regulatory clarity.
There are a number of areas where the industry interacts with regulators – from banking to securities to taxes. That has become part of the problem.
Tokens that act like securities could fall under the SEC. The Commodity Futures Trading Commission (CFTC) is eager to keep its oversight of currency markets. The IRS wants to make sure transactions that result in gains are properly taxed. They all want a piece of crypto oversight.
While it's unclear if or when Congress might pass legislation on the crypto industry, these agencies could have a major impact on how the industry operates. Yet key agencies lack permanent heads, and future appointments could shift regulatory strategies considerably.
One big question is who is responsible for regulating crypto exchanges. The SEC's Gensler in his recent remarks said he was concerned about manipulation and is reviewing how to regulate crypto exchanges.
Currently, crypto exchanges have no overarching regulation, as equity markets do. Coinbase, for example, is registered in most states with a money transmitter license, but not as an exchange. (Related: Bitcoin wallet COINBASE now seizing accounts of Americans… users rage against "total ripoff" as their Coinbase accounts VANISH.)
The Office of the Comptroller of Currency has granted national trust charters to a handful of exchanges, but the agency's new chief, Michael Hsu, has called for a review of crypto rules.
Those patchwork frameworks are designed to keep customers' money secured and guard against money laundering, but they're not meant to prevent price manipulation.
The House of Representatives passed a bill in April to create a digital asset working group with the SEC and CFTC. The group, which would include industry companies, would produce a report within a year on a regulatory framework for digital assets. The fate of that bill in the Senate is unclear.
Also, the SEC and CFTC already have a cross-agency working group on crypto. The CFTC doesn't have a permanent head yet, but Chris Brummer has reportedly been a lead candidate. He has a deep background in crypto and is well-liked in the industry.
The IRS has been less vocal on cryptocurrency until the Treasury stated in its press release that it would require disclosure of cryptocurrency transfers worth more than $10,000.
Beyond beefing up reporting requirements, tax authorities have to figure out what to make of technical aspects of cryptocurrencies like hard forks and airdrops, in which cryptocurrency holders can receive new crypto.
Hard fork refers to a radical change to the protocols of a blockchain network that effectively results in two branches, one that follows the previous protocol and one that follows the new version. On the other hand, airdrop is a marketing stunt that involves sending coins or tokens to wallet addresses in order to promote awareness of a new virtual currency.
When Bitcoin had a hard fork in 2017, which resulted in holders of bitcoin receiving bitcoin cash tokens, some reported the bitcoin cash they received as income while some reported only the sale of bitcoin cash as income. Others treated it like a stock split.
The IRS released guidance related to hard forks in October 2019, clarifying that taxpayers who receive new crypto as a result of a hard fork are responsible for any accession of wealth related to the event.
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