Taxation and Legal Implications of Cryptocurrency Transactions in the US from a Business Perspective
Cryptocurrencies hit news headlines every week as the prices of popular digital currencies reach new levels. Although people refer to crypto as the new digital token, the history of cryptocurrency goes back to 1998, when several attempts were made at creating digital currencies with encrypted ledgers. Before Bitcoin, the first established cryptocurrency, other influential currencies were formulated but never wholly developed.
The first ever cryptocurrency, before Bitcoin was released, was e-Cash, created by DigiCash, a company created by David Chaun, a famous cryptographer. Other currencies included B-Money, Hashcash, and Bit Gold. However, currencies took over 20 years to evolve into the new popular cryptocurrency we see today.
Cryptocurrencies are designed to be decentralized, operated on blockchain networks, and entirely free from financial institutions’ interference and government oversight. However, there are legal and tax implications that crypto businesses in the US must adhere to if the value of digital tokens increases, irrespective of whether it is used as an investment or spending.
This article will discuss the legal implications, taxation policies, and business perspectives on crypto transactions in the US.
Legal Implications of Cryptocurrency Transactions in the US
Cryptocurrencies have been a significant focus of the US state and Federal governments. Crypto investors and businesses must check the current regulations that may affect their trade tax liability. With highly restrictive rules, crypto prices may be affected negatively. On the other hand, laws that require US-based crypto exchanges to maintain accurate records of crypto transactions and avoid market manipulation may open the crypto market for more conservative traders and investors, leading to higher prices.
Many US State governments have passed laws that have considerably affected crypto and blockchain technology, with maximum activities taking place in the legislative branches. Generally, at the state level, there are two approaches – some states promote crypto by passing favorable regulations, exempting crypto from Securities laws and money transmission statutes. At the same time, others are easing the use of decentralized autonomous organizations (DAOs). There is no uniformity in the definition of crypto, also called digital assets, virtual currencies, digital tokens, crypto assets, or just crypto.
The Securities and Exchange Commission (SEC) generally has monitoring and regulatory authority over crypto transactions. The SEC has been crystal clear on its initial coin offerings (ICOs) regulations. If crypto issued in ICO has utility, the asset will be deemed legal security regulated under the Securities Act. A few market professionals have tried highlighting the voucher-like utility characteristics to help claim that the crypto coins or tokens are not securities. Such disturbing arguments have deprived investors and traders of the mandatory protection required in crypto transactions. The SEC stated that to determine whether a guarantee is being sold or not is to check how they are being sold and the buyers’ reasonable expectations.
The IRS considers crypto a digital asset, similar to commodities and stocks, subject to capital gains or losses. According to IRS guidance, if, at any time, a crypto user exchanges or sells digital assets, it becomes a taxable event. The IRS often imposes taxes on crypto as a digital asset, subjecting them to short-term or long-term capital gains taxes.
Taxation of Cryptocurrency Transactions in the US
The IRS classifies crypto as securities, meaning capital gains and crypto revenues are taxable, while crypto losses are subject to tax deductions. One of the biggest misconceptions in the crypto space is that people think since crypto is decentralized, it is invisible to legal bodies and regulators. The IRS considers it an asset and is subject to taxes based on the difference between cost price and sale price.
Capital gains are differently taxed based on the duration of holding an asset before selling it. The exact rate for capital gains tax depends on many factors. However, long-term capital gains are usually taxed at a lower rate. Crypto transactions are classified for tax purposes such as selling, exchanging, spending, earning, cryptocurrencies, and receiving free coins. Crypto earnings fall under taxable income based on the token value at the time of receipt. It includes profits from mining, crypto staking, yields on digital accounts, and cryptocurrency earnings as bonuses or regular pay.
Business Perspective on Cryptocurrency Transactions in the US
Operating as the best crypto exchange USA and allowing crypto payment methods have many advantages. Crypto exchanges in the USA can reduce their costs to less than 1% of the value of each transaction. Any cryptocurrency exchange in the USA that supports crypto as one of the payment methods can reap various benefits, like offering faster and cheaper money transfers at lower costs, making acceptance an excellent idea.
US crypto exchanges can increase traction by offering crypto services to their users. More than 2300 US businesses, including crypto exchanges in the USA, have accepted different cryptocurrencies for various transactional, operational, and investment purposes. Using cryptocurrency to conduct business presents opportunities and challenges with solid incentives and unknown dangers. More and more companies are venturing to include crypto in their businesses, providing access to more new demographic groups. It also allows access to new liquidity pools and furnished options not available with traditional payment methods.
The future outlook for crypto regulations and taxation in the US does not seem to hint at the possibility of digital assets being banned or destroyed through rules. With the global institutional adoption of crypto, growing punitive actions are unlikely. Financial leaders from different parts of the world have become digital bulls. This only aims to bridge the gap between traditional and crypto finances, which is an ever-growing need for everyone involved in the crypto space.
There is also the need for tax and accounting professionals who can rise to the challenge presented by this new digital asset class. It is high time to continue educating our mindset to ensure that businesses are ready to manage crypto and its intricacies presented by digital assets. Many regulations are yet to be implemented but are being consistently discussed by lawmakers and policymakers, such as Wash sales and regulations on crypto exchanges and banking. Whatever happens, businesses like crypto exchanges in the USA will most likely continue operating in the market. Hence, it is only prudent and wise to keep an eye on these developments to be well informed about the regulatory landscape in the US.
Paula has recently joined the family of FinanceWhile News. She holds a master degree in Economics and holds vast experience in dealing with different types of content for print as well as digital media. When Paula is off work, you will find her engrossed in books and music.