THE TRANSATLANTIC MAGAZINE
THE TRANSATLANTIC MAGAZINE
Recent developments related to cryptocurrency show international governmental interest in making associated investment activities more transparent. There have been several 'top-level meetings' at the White House in Washington DC as the US and other governmental agencies work to gain insight into exchanges and the activities of individual taxpayers.
The recent passage of a US crypto-tax within the infrastructure bill last summer and continuing efforts to clarify the US government's position on associated currencies raises additional red flags regarding accountability and taxation for US taxpayers. This has garnered a significant reaction in Congress and the mobilization of crypto industry lobbying on Capital Hill. Many US politicians believe crypto could be a hot topic in the coming mid-term elections.
The White House has asked several US agencies to submit reports regarding various aspects of the crypto industry and the management of this evolving market which are due in late 2022. Most expect an executive order from the US President in an effort to increase regulatory oversight and protect US investors from potentially fraudulent or misrepresented crypto schemes
The 2021 IRS Form 1040 will ask taxpayers a direct "Yes" or "No" question near the top of the form to determine if the US taxpayer "received, sold, exchanged or otherwise disposed of any financial interest in any virtual currency." You cannot leave this block unanswered.
The European Parliament in Brussels also wishes to "regulate" the cryptocurrency industry in an effort to create a framework for the European Union to license the issuance of cryptocurrencies and to monitor the activities of service providers. These efforts have been classified as an effort to protect EU citizens' "freedom and sovereignty" from being compromised by the crypto industry. The EU hopes to have regulations in place to provide ways to verify details regarding each cryptocurrency while providing additional protections for consumers.
One of the greatest challenges for the EU is the vast diversity of taxation systems across its 27 member countries. Efforts are underway to create standards and legal certainty for crypto investors. In late November 2021 a significant proposal, 'Regulation on Markets in Crypto Assets' (MiCA) was published to help pave the way for negotiations between political entities and ultimately the enactment of supporting legislation. While this initiative is not immediately focused on tracking and taxing the activities of EU cryptocurrency investors one can read the writing on the wall.
It is also interesting to monitor the development of Central Bank Digital Currencies (CBDCs) in efforts to develop government-backed electronic money which would ultimately replace existing traditional coin and paper currencies.
How will international governmental agencies ultimately regulate and tax cryptocurrencies, Non-Fungible Tokens (NFTs) and other blockchain cryptographic assets? How should US taxpayers prepare for direct questions from the IRS about cryptocurrency activities on their 2021 Form 1040? Should cryptocurrency investors give substantial consideration to the tax strategies associated with business income versus capital gains? It is important for all holders of cryptocurrency to seek the advice of an experienced tax attorney or financial adviser. The failure to disclose holdings presents substantial financial and in some cases criminal exposure. The IRS is laying the foundation for pursuing this potential source of tax revenue now and into the future.
These recent developments clearly signal the intentions of international governments to regulate the cryptocurrency industry and ultimately monitor and tax associated activities. For those who perceived crypto as a secretive method for aggregating wealth and avoiding taxation the message is clear: "Forewarned is forearmed."
Janathan Allen is a Partner/Tax Attorney from Allen Barron, Inc., specialists in complex international tax issues. For more info go to www.allenbarron.com or contact Janathan directly via email; jallen@allenbarron.com
