There is nothing certain in life except death and taxes! In March 2004 the IRS issued guidance on taxation of crypto-currencies. The gist of the message to consumers and corporates were the following:
- Digital currency payments must be reported to IRS.
- Gains from the sale of digital currencies are treated like those from a real estate investment.
- Wages paid to employees in digital currencies are taxable and must be reported.
In November 2016, the IRS sent a “John Doe” Summons to Coinbase, asking for a complete dump of all transactions that happened on the platform from 2013 to 2015. Now, this sets a bad precedent when governing agencies demand such data that hurts data privacy of consumers. This could be because, the IRS has no clue what the taxation on crypto-currencies should be. And the intention behind the blanket data request is perhaps to understand what the thresholds for taxation should be.
Fintechs in the US have generally struggled with the regulatory landscape, primarily because of structural challenges and overlapping regulations. Unlike the UK where the regulations are pretty centralised, the US has state and federal agencies coming up with regulations that can be painful for startups to navigate through. There is little coordination between these regulatory bodies. Also, the regulations are very rules based and not considered as principles, which means they are inflexible.
Moreover serious criminal penalties may be imposed on an entrepreneur who chooses to take a liberal interpretation of when an activity is a money transmission. There can also be serious implications under the Bank Secrecy Act if an entrepreneur naively chooses to seek forgiveness rather than permission. This liability regime also extends to investors, managers and employees in some cases.
At the moment, crypto-currency transactions are treated like property transactions, irrespective of the size of the transaction. The taxation policy on foreign exchange is slightly better where there is a threshold on gains(of $200) above which one needs to report the transaction. However, if I bought a cup of coffee using bitcoins it is a taxable event. And if I managed a gain between the time I acquired a Satoshi and spent it, I must report it to the IRS irrespective of the size of the gain.
The coinbase summon from IRS has triggered some republican congressmen to lobby for better tax laws around crypto-currencies. Coincenter, a non-profit is leading the efforts on getting better clarity on taxation of crypto-currency transactions and has seen positive responses from some members of the congress. With bitcoins starting to get recognised across various government bodies in developed economies, some clarity from Washington DC would be more than welcome.
While taxation on crypto-currencies seem to be one area where the rules are still unclear, Fintech/Payments regulations in the US need ground up thinking too. Earlier this week, Coincenter sent out a letter to the “Office of the Comptroller of the Currency” (OCC) asking for an innovation friendly regulatory regime.
In the letter they praised the UK’s Financial Conduct Authority (FCA) for making it easy and quick for innovative startups and entrepreneurs to comply with consumer protection regulations. They have recommended that the US replicate the UK regulatory regime to promote innovation.
There is the other issue of governance of crypto-transactions to avoid terrorism financing. A recent assessment by the Center for a New American Security acknowledges that there is only anecdotal evidence that terrorism is being financed by crypto-currencies. This is primarily because the financial crime and money laundering controls at banks are still incomplete or insufficient to stop terrorist financing. However, congress may soon commission a study in this regard which will further influence the regulatory landscape of crypto-currencies in the US.
Arunkumar Krishnakumar is a Fintech thought-leader and an investor.
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