Cryptocurrency has exploded in popularity and value over the past year, continuing a trend that has been bubbling up over the past several years. In any industry where investors are seeing tremendous gains over a short period of time, the government will naturally become interested. If your portfolio includes cryptocurrency holdings, you might be curious about the steps that the government is taking to regulate crypto trading in the United States.
Congress recently passed a bill that aims to nail down when the government has oversight over cryptocurrencies and crypto trading. The legislation as written will lead to the creation of a working group made up of regulators and practitioners. The government hopes that the new body will help them keep up with the rapid proliferation of crypto in the United States, so that they can avoid losing out on realized income from U.S. taxpayers’ cryptocurrency investments.
This year, the U.S. House of Representatives passed a bill that they hope will help them understand cryptocurrency. H.R. 1602, also known as the Eliminate Barriers to Innovation Act of 2021, was originally introduced in March of this year and passed shortly after with bipartisan support. The action creates a digital asset working group comprised of Securities and Exchange Commission (SEC) officials, Commodity Futures Trading Commission (CFTC) representatives, and some private sector experts.
The legislation was introduced by representatives from opposing parties, Congressman Patrick McHenry (R, NC) and Congressman Stephen Lynch (D, MA). According to Rep. McHenry, the Republican leader of the House Financial Services Committee, “Innovators across the country are leading the way on financial technology … Washington needs to step up. Establishing this working group is an important step to provide necessary regulatory clarity.” In a statement to media, Rep. Lynch urged Congress to consider the “possible vulnerabilities that the wider adoption of digital assets might present while addressing the lack of clarity in the regulation of these financial instruments to mitigate potential harms that might occur.”
Once the working group is formed, they will be tasked with producing a report including analysis of the existing framework for domestic regulation of cryptocurrency and other digital assets in our country as well as others. The report should study the developments in other nations for dealing with digital assets and their objective level of effectiveness. Also included in the report are suggestions for actions that will protect investors, reduce fraud, and help Americans to comply with the Bank Secrecy Act. The report is due in less than a year from the formation of the working group.
The working group’s primary responsibility will be making determinations about if and when a cryptocurrency is a security. Securities are financial instruments that have certain distinct characteristics. Securities can be equity, debt, or hybrids of the two, and are typically fungible vehicles used to generate capital in both private and public markets. The Supreme Court defined securities in 1946 based on four elements: investment contract, common enterprise, promise of profits, and promotion by a third party of the offering.
Why is this important? The government has substantially more regulatory powers over securities than non-securities. The SEC and other Self Regulatory Organizations (SROs) are the watchdog over the form and manner in which securities are traded in the United States. The goal of this legislation is to find avenues by which the federal government can assert control over the cryptocurrency trading markets.
Crypto assets that are considered securities are subject to pre-clearance and reporting requirements set forth in Rule 204A-1 of the Investment Advisers Act of 1940 (IAA). In other words, if your crypto is a security, you face requirements to disclose your holdings, even if they were not involved in a recent transaction.
Investment advisers also may calculate their assets under management differently depending on whether their crypto holdings are securities. If an advisor has “custody” (a legal term indicating financial control) over an investor’s cryptocurrency asset and the asset is deemed to be a security, the investment advisor is subject to Rule 206(4)-2 under the IAA. When subject to Rule 206(4)-2, investment advisors must comply with explicit practices meant to protect investor clients from misappropriation or fraud on the part of the advisor.
There are several helpful strategies that you can implement today in order to protect your gains from cryptocurrency assets against increased government overreach. First, you should get comfortable with the practice of diligent record keeping. If the government attempts to audit you over frequent crypto transacting, it can be vital to have specific dates and values at your immediate disposal. Your best bet is to consult the knowledgeable tax law attorneys and CPAs at The Tax Law Offices of David W. Klasing, so that you don’t get caught off guard by developments in crypto tax law.
Note: Please do no contact us regarding the regulatory environment surrounding cryptocurrency including when cryptocurrency is considered a security as we are solely Tax Attorneys and CPAs.
We at The Tax Law Offices of David W. Klasing earn our reputation by taking on the government on behalf of clients just like you. If you want the best protection available, call us to set up an appointment at (800) 681-1295.
Have large amounts and multiple years of unreported cryptocurrency trading gains and wish to sleep well at night again and avoid criminal tax prosecution? We can help!
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including unreported cryptocurrency trading income coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
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