When capitalization of popular cryptocurrencies hit trillions of dollars, they immediately attract attention of various government agencies and taxation authorities that aim to regulate and tax them. According to a report from Reuters, this week the U.S. Treasury proposed to treat cryptocurrency deals like cash deals and report all sizeable transfers to the Internal Revenue Service (IRS). Meanwhile, the head of the U.S. Federal Reserve said that cryptocurrencies pose risks to financial stability.
For years. cryptocurrencies like Bitcoin, Ethereum, and Chia have been on an uncharted territory, hidden from the eyes of regulators and tax authorities. People who mine cryptocurrencies and buy certain products or services using them do not report about their income and spending. Since transactions are made in an de-centralized system, it is close to impossible for authorities to control it. Such an opportunity arises when people convert real money to crypto and vice versa, which is what happens when cryptocurrencies become investment instruments for millions of people worldwide. For obvious reasons, taxation authorities do not want to miss it.
The Biden administration proposal to strengthen tax compliance includes a obligation for transfers of at least $10,000 to be reported to the IRS, which basically means that the U.S. government wants to treat crypto like regular cash, reports Fortune.
“As with cash transactions, businesses that receive cryptoassets with a fair-market value of more than $10,000 would also be reported on […] [in order to] minimize the incentives and opportunity to shift income out of the new information reporting regime,” a statement of the Treasury Department regarding the tax-enforcement proposals reads.
Jerome Powell, the head of the U.S. Federal Reserve, said that cryptocurrencies pose risks to financial stability as they are unregulated and therefore unprotected. Furthermore, they could be used for tax evasion. Meanwhile, he admitted that the U.S. central bank is exploring the possibility of adopting its own central bank digital currency (CBDC).
“To help stimulate broad conversation, the Federal Reserve Board will issue a discussion paper this summer outlining our current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context,” said Powell. “As part of this process, we will ask for public comment on issues related to payments, financial inclusion, data privacy, and information security.”
Treating cryptocurrencies like cash and regulating transactions is not something that will make early adopters of Bitcoins very happy. But regulation may actually enable broader adoption of cryptocurrencies because they are going to gain more trust from the banks and from cautious individuals. Meanwhile, regulated CBDCs is a way for governments to start phasing out traditional cash and replace it with digital currencies.