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U.S. financial regulators are proposing overdue cryptocurrency regulations that don't satisfy critics on the political left or right.

Treasury, IRS Issue Regulations and G20 Nations Issue a Mandate

The U.S. Treasury Department and Internal Revenue Service issued long-awaited cryptocurrency regulations last week as the just-ended G20 summit in India called for global regulation and information-sharing.

Cryptocurrencies are alternative digital currencies intended to allow the exchange of value or make speculative investments without intermediary institutions such as banks or stock brokers. Powered by blockchain technology, cryptocurrencies can be highly volatile and tax deductions can fall through the cracks.

A provision was inserted into the 2021 infrastructure law to require additional reporting of cryptocurrency transactions to the IRS. Treasury and IRS were directed to finalize rules before the end of this year so anticipated additional tax revenues could be collected starting in 2024. The Joint Committee on Taxation projected additional crypto regulation could net $28 billion in additional federal tax revenue over nine years.

The draft 282-page regulation triggers a two-month public comment period followed by a hearing on November 7. That timeline makes it improbable a final regulation will be in  place by the end of the year.

Reactions Mixed to Proposed Regulation
Four senators – three Democrats and Independent Bernie Sanders – sent a letter to the IRS saying a delay of regulation past the December31, 2023 deadline was “unacceptable” and would enable “crypto tax evaders to game the system, exploit loopholes and siphon off billions of dollars a year from the U.S. government.”

Senator Elizabeth Warren, D- Massachusetts, also said the proposed rule, which does contain some exemptions, falls short of congressional intent to “prevent wealthy tax cheats from hiding income in digital assets”. Treasury and IRS issued a statement claiming the proposed rule would “crack down on tax cheats while helping law-abiding taxpayers know how much they owe on the sale or exchange of digital assets.”

House Financial Services Chair Patrick McHenry, R-North Carolina, took a different tack. He supported a delayed effective date and proposed exemptions in the rule, while also calling for legislative action to fi “misguided” reporting requirements contained in the 2021 legislation.

“The Biden administration must end its effort to kill the digital asset ecosystem in the U.S. and work with Congress to finally deliver clear rules of the road for this industry,” McHenry said in a statement. He expressed support for a billhe’s introduced. “Our goal is to strike the appropriate balance between consumer protection and encouraging responsible innovation.”

What the Regulation Requires
“It’s critical to ensure that participants transacting with digital assets pay their taxes,” Blockchain Association CEO Kristin Smith said in a statement. “However, it’s important to remember that the crypto ecosystem is very different from that of traditional assets, so the rules must be tailored accordingly and not capture ecosystem participants that don’t have a pathway to compliance.”

The proposed rule, according to Treasury and IRS officials, is intended to align tax reporting rules for cryptocurrency transactions with those that apply to investors in other types of financial instruments.

The rule adds “Anyone responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” to the definition of a broker required to provide tax forms to the IRS and customers, including names, addresses and gross proceeds for transactions.

The rule also mandates broker-to-broker reporting and that business transactions of more than $10,000 in cryptocurrency be reported to the IRS, a rule that currently just applies to large cash payments.

Congressional intent for crypto regulation was to prevent wealthy tax cheats from hiding income in digital assets.

G20 Cryptocurrency Mandate
G20 leaders agreed to establish a comprehensive crypto framework that expands digital asset transparency and includes information-sharing between countries. The approved declaration says:

“We call for the swift implementation of the Crypto-Asset Reporting Framework (CARF) and amendments to the CRS [Common Reporting Standard]. We ask the Global Forum on Transparency and Exchange of Information for Tax Purposes to identify an appropriate and coordinated timeline to commence exchanges by relevant jurisdictions.”

Under the proposed regulatory framework, crypto firms, including unregistered crypto platforms and wallet providers, would share transaction details annually, beginning in 2027.

The CARF was initiated in 2022 by the Organization for Economic Cooperation and Development, to disclose transaction details to tax authorities. The European Union updated its crypto regulations in May by incorporated CARF. Any transaction performed on a crypto platform must disclose details among European countries such as the user’s name, account number and blockchain address.

G20 central bank governors and finance ministers will work out more details on a global regulatory framework for cryptocurrency when they meet next month.