Should you be worried about the federal regulation of crypto? President Joe Biden’s 2023 budget proposal includes several measures that would alter tax laws associated with cryptocurrency.
And if you think that taxation is the upper limit of what the government might do about cryptocurrency, you might do well to remember that at the time these new rules are being floated, there are midterm elections and a looming presidential election to deal with.
Politicians on both sides of the aisle (and third parties, too) love making promises about how they will deal with difficult issues–promises that can only be lived up to “in the future”. Crypto is a topic on a lot of political minds, and politicians love to leverage your fears about tomorrow in order to garner votes today.
Precisely because crypto isn’t as well understood as other issues, it’s certain that some politicians and pundits will play to that ignorance as part of the election cycle. That means added scrutiny on all sides of the debate. More scrutiny typically leads to some form of additional rulemaking.
The official site of the Federal Reserve features a page dedicated to a concept known as Central Bank Digital Currency or CBDC. This is referred to on the page as “a digital form” of central bank money “available to the general public.”
The Fed says CBDC as used in the United States comes in one of two forms; hard currency and “digital balances”. It is true that U.S. citizens have held digital money for a long time (bank balances, payment apps, etc.). The Central Bank Digital Currency is different because “a CBDC would be a liability of the Federal Reserve, not of a commercial bank”.
The Fed has, at press time, not committed to adopting a digital currency. But the fact that a government agency, especially the Fed, has taken an interest means the writing is definitely on the digital wall.
And the Fed isn’t the only one. A March 2022 executive order from the President of the United States includes language that the Biden administration “sees merit” in the U.S. developing a CBDC, nothing that any “future dollar payment system” should be designed with privacy, security, and the ability to work with other systems (that regrettable five-dollar word, “interoperability”).
But wait, there’s more.
At press time, cryptocurrencies like Bitcoin, Dogecoin, Ethereum, etc. are not regulated in the United States as currency. For federal tax purposes, crypto is property. But that may be changing. The proposed 2023 federal budget includes items directly aimed at taxing crypto, and if it becomes re-defined as currency in the American economy, that changes many things in the crypto world.
According to the Biden Administration’s calculations, the federal government could start taking in as much as $11 billion in tax dollars over a 10-year period by “modernizing” regulations that govern accounting practices as well as how digital assets are reported for tax purposes. If the government starts applying marketplace rules to actively traded crypto, it could result in something known as mark-to-market valuation–and that’s not necessarily trader-friendly.
Mark-to-market rules could affect how virtual currency is valued or appraised. In a Bitcoin context, this approach takes current market conditions into account and that may or may not reflect the actual fair market value of the crypto. You could be taxed for “unrealized gains” holding crypto that dramatically increases in price even if you do not sell the crypto at that price point.
Another proposed regulation that directly affects cryptocurrency–future tax law proposals include one that would require U.S. citizens to report all holdings in an offshore account that exceed a certain limit. At press time that proposed limit was $50K.
Given that amount is less than the upper limit of value on Bitcoin, you can see where this might be headed–assuming Bitcoin ever makes it back above the $60K-per-coin threshold.
If you aren’t convinced that some form of crypto regulation is coming, consider another Biden Administration proposal that would require U.S. banks to share data with the Internal Revenue Service about investments or other holdings about non-residents and foreign businesses doing business with those banks. This is done under the guise of preventing tax evasion and to shore up “voluntary” tax compliance.
On March 9, 2022, the Presidential Executive Order mentioned earlier in the article was published, including a requirement that within six months from that date, the following agencies were tasked with putting together a report about the future of money and systems of payment in the United States:
- Secretary of the Treasury
- Secretary of State
- Attorney General
- Secretary of Commerce
- Secretary of Homeland Security
- Director of the Office of Management and Budget
- Director of National Intelligence
It’s entirely possible that some HODLers reading this may yet be unconvinced that regulated crypto in the USA is coming, but for the rest of us, the future isn’t as unwritten as we might want to believe. The “platform” for the study required by the executive order includes reviewing:
- Implications of a United States CBDC for national interests
- Implications for economic growth and stability
- “Potential implications” a United States CBDC might have on financial inclusion
- Possible relationships between a CBDC and private sector-administered digital assets
- Reviewing how “foreign CBDCs” could displace existing currencies
Section Two of the order has some things to say that we’ve been warning readers about since the start. The wild west nature of crypto has proven to be a big liability for some investors, startups, and traders. That has not gone unnoticed in Washington D.C.
The “Objectives” section of the executive order targets this specifically. “We must,” the executive order states, “protect consumers, investors, and businesses in the United States. The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place.”
For some who prefer the unregulated landscape of crypto, that is a chilling line. As is the following one about addressing “the absence of sufficient oversight and standards.” But there is one more nail in the coffin, so to speak.
When the federal government gets serious about regulation, it often turns to hyperbole about terrorism and organized crime. That familiar talk is definitely part of the executive order, and for some readers, the following line says everything you need to know about the future of cryptocurrency and the current lack of regulation;
“We must mitigate the illicit finance and national security risks posed by misuse of digital assets. Digital assets may pose significant illicit finance risks, including money laundering, cybercrime and ransomware, narcotics and human trafficking, and terrorism and proliferation financing.”
Those who are experienced in crypto but not American politics may not recognize that dog-whistle for what it is. But for those who review these types of executive orders and other actions, the language has a very familiar ring to it.
Federal regulation of cryptocurrency, according to the executive order discussed above, could be imminent. The Biden Administration has addressed the unregulated nature of crypto quite thoroughly including providing the means for future enforcement of financial laws that could be applied to crypto.
When you tax crypto and make your own federal government version of it you create an environment where more regulation is needed to enhance those operations. The current proposals cannot be, by their very nature, enacted in a regulatory vacuum. Further oversight will be required to make sure the rules are followed and to establish concrete liabilities for breaking those rules.
And of course, that itself leads to more regulations–how long is the punishment for breaking the new rules, how costly is it to be fined for violations, and who gets shut down for good versus getting punished but remaining in business?
These are only some of the questions that remain in the light of a decisive move by the federal government toward more formal regulation of crypto.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.