The Latest Insights into Cryptocurrency Taxation

Gain strategic insights into an evolving global tax environment

The rapid rise in popularity of cryptocurrencies has made it clear that these digital assets aren’t going away soon. But with this new financial landscape come new risks, requirements, and tax implications for both holders and issuers. In this year’s Bloomberg Tax Leadership Forum, we convened tax leaders, regulators, and leading corporate tax executives to gain insights into the latest developments in the taxation of cryptocurrencies. 

New regulations for stablecoins

Since 2011, Senator Patrick Toomey (R-Penn.) has played an influential role in tax and financial policy as the top Republican on the Senate Banking, Housing, and Urban Affairs Committee, and as a senior member of the Senate Finance and Budget Committees. This April, he released a draft bill that aims to regulate stablecoins — a digital currency backed by the U.S. dollar or another fiat currency. 

"I think that stablecoins have enormous potential," Toomey said. "Certainly today they are used as, really, the medium of exchange within crypto trading. But I think there are technological features that will make it quite plausible that stablecoins will be used in the ordinary, physical economy at some point." 

"I think there are technological features that will make it quite plausible that stablecoins will be used in the ordinary, physical economy at some point."

As stablecoins become more widely adopted, this bill would impose certain disclosure requirements on issuers, especially for coins backed by fiat money. Because these cryptocurrencies tie directly into our existing financial system, a major event could have implications for our existing markets.

"I think [this bill] will be a really important step in the broader acceptance and regulation of cryptocurrencies," Toomey said. "This is the place to start."

IRS sets its eyes on crypto

Over the last decade, the IRS Criminal Investigation Division has been expanding its capabilities to become a prominent force in tracing cryptocurrencies and dark web activities.

In discussing the organization’s new prioritization of cryptocurrencies, Jarod Koopman, executive director of the Cyber and Forensic Services section, said, "It's a new environment in which financial transactions are occurring. And with that comes the potential for both criminal activity, illicit activity, as well as tax evasion. So the IRS, and specifically IRS Criminal Investigation, has to be finely in tune with these advancements and these developments to ensure we are staying on top of this new environment."

While people might typically think of the dark web as being in the realm of the FBI, Koopman noted that "[the IRS] has had 100-plus years of the finest financial investigators in the world. And our primary job, our sole function, is tracing financial transactions whatever the medium." Today’s world of cryptocurrencies "just lends itself to exactly our skillset and our sophistication of being able to track and follow those financial flows."  

Tax regulations are coming to the crypto world

Cryptocurrency users and brokerages are seeing an increasing amount of regulatory activity when it comes to taxation and reporting. The Biden administration’s new infrastructure bill includes a section on CARF, the Crypto-Asset Reporting Framework, which has tax implications for both individuals and organizations. 

On an individual level, Shehan Chandrasekera, head of tax strategy at CoinTracker, said, "I think what we’re seeing right now is the world going from an account-based financial system to a wallet-based financial system."

"What we’re seeing right now is the world going from an account-based financial system to a wallet-based financial system."

In this system, he notes, "there are two types of crypto users: single exchange users, and multi-exchange users." While the infrastructure bill will make tax compliance relatively easy for those using one exchange, multi-exchange users are increasing every day, putting strain on reporting systems. 

On an organizational level, Sahel Assar, tax counsel at Buchanan, Ingersol, & Rooney, said "companies are struggling to understand what the regulatory rules are in the tax base so that they can be compliant, and in the IRS's good graces." 

Miles Brooks, director of tax strategy at Coin Ledger, pointed out that companies would benefit from more guidance from the IRS. 

"There have been many many more different types of activities and different types of transactions that have come about within the last couple years," Brooks said. "We need the IRS to be on top of this."

As cryptocurrency and algorithmic stablecoin crashes continue to appear in headlines, it’s clear that regulation and guidance are needed in this space.

"We’ve seen lots of centralized institutions go through some hiccups," Jordan Bass, owner of Bass Law, said. "I am of the opinion that we need sensible regulation; but the centralized authorities — where we have the fiat on-ramp and off-ramp — tend to be where we are right now, where we’re seeing a lot of breaking down in the ecosystem." 

To overcome the challenges involved with regulating cryptocurrencies, Sharon Heck, corporate vice president of finance and chief tax officer at Intel Corporation, suggested legislators must adapt their thinking and rule-making to keep pace with the evolving technology.

"I would just encourage all of us that work in tax policy to think to the future," Heck said. "Are the rules that we’re writing today going to carry us into the world that’s coming?"

To watch the full 2022 Bloomberg Tax Leadership Forum webinar and earn free CPE and CLE credit, click here to access Day 1 and Day 2.