March has been a busy month for crypto clarification, with the Organization for Economic Co-operation and Development and the Biden administration releasing blueprints.
The OECD has published a public consultation document outlining a proposed global tax transparency framework for crypto-assets. The proposal would require crypto exchanges to share transaction details with foreign tax authorities and outlines suggested changes to the common reporting standard, intended to address some of the transparency issues the global crypto market has faced. This comes as individual countries push for their own crypto tax reform, including the US Treasury Department.
“You have to go back to 2017, when the OECD adopted a CRS that provided for the exchange of information between members,” said Charles Kolstad, partner in the private client and tax group at law firm Withers Bergman LLP. .
“Under CRS, countries that have adopted the standard would automatically report and receive tax information,” Kolstad said. “This framework did not specifically address virtual assets and service providers, so there were ongoing discussions to address the issue. The new global tax transparency framework is the result. The Crypto Asset Reporting Framework, released in late March as a public consultation document, would complement the CRS.
The CARF would provide for the reporting and automatic exchange of tax information on crypto-assets between jurisdictions, and would require intermediaries to identify their customers and tax jurisdictions, and report their aggregate transaction values on an annual basis.
“The thrust of the OECD framework is that they believe there is significant tax evasion due to perceived anonymity in cryptocurrency, so they want a growing group of people be covered by CRS,” Kolstad explained. “What is important is that there is one country conspicuously absent – the United States. Because the United States is not part of the CRS network, it will not automatically obtain information about people operating outside the country. That said, it is likely that the United States will seek the same information from FATCA that the OECD will obtain.
FATCA – the Foreign Account Tax Compliance Act – which was passed as part of the HIRE Act, requires foreign financial institutions and certain other non-financial foreign entities to report foreign assets held by their U.S. account holders or to be subject to a withholding tax on the Payments. The HIRE Act also contained legislation requiring US persons to report their financial accounts overseas, based on value.
The OECD has asked for public comments on the proposal, Kolstad said. “Despite the comments that may be made, the OECD will not have a particular interest in relaxing the rules for categories of players in the crypto space. We anticipate that they will adopt the rules pretty much as written, and then it will be up to the 97 countries that have adopted the CRS to implement the legislation in their own countries.
Action in the United States
Days before the OECD action, the Biden administration issued an executive order containing a government-wide plan for digital assets, with a focus on cryptocurrency.
“The growing size of the crypto market, the growing participation of US investors and the growing number of countries planning to digitize their sovereign currencies indicate that the councils are a welcome and timely development,” remarked Joyce Beebe, research fellow in public finance at Rice University. Baker Institute.
“How the federal government deals with cryptocurrency depends on who you ask,” she noted. “As of 2014, the IRS considers cryptocurrency to be property rather than currency for federal income tax purposes. However, this does not mean that tax reporting for cryptocurrencies is clear or easy; taxpayers have filed several lawsuits regarding the reporting of crypto gains, and variations in the tax base on different dates mean that record keeping could be onerous. At the same time, the IRS has targeted cryptocurrency exchanges in pursuit of non-compliant investors, recouping millions in underpaid taxes.
Other government agencies have their own take on cryptocurrency.
“The Securities and Exchange Commission considers cryptocurrencies to be securities and therefore subject to its oversight. It has taken several cases to court involving entities that failed to comply with SEC registration and disclosure rules, and also imposed fines on several operators, including a $50 million fine in February. 2022 against BlockFi, which offered investors an interest in lending cryptocurrencies.
The Commodity Futures Trading Commission, on the other hand, considers cryptocurrencies to be commodities. It has taken action against unregistered crypto-trading platforms for non-compliance with the Commodity Exchange Act.
And the Financial Crimes Enforcement Network, or FinCEN, whose main mission is to protect the financial system against illicit uses and to combat money laundering, has a different point of view from the IRS, the SEC or the CFTC.
“In the published guidance, the agency has indicated that cryptocurrency is a form of currency under FinCEN regulations,” Beebe explained. “Specifically, it indicates that cryptocurrency is a medium of exchange that functions like money in some environments, but does not have all the attributes of real money. For example, it is not legal tender – usually held by coins and paper money – in any jurisdiction.
And recently, the Department of Labor warned trustees of their duty of care in using any digital asset — cryptocurrency, tokens or other derivatives — as investments for 401(k) plans, the attorney noted. tax Barbara Weltman, author of “JK Lasser’s Small Business Taxes 2022.
“This cautions plan trustees to exercise ‘extreme care’ before considering adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants,” a- she declared. “These investments are highly speculative and are difficult to value in many cases,” she said. “In addition, participants may lack knowledge of how they work.”
Likewise, states have their own stance on issues surrounding the crypto space. Washington State is the first to announce guidance plans on non-fungible tokens, or NFTs. Washington’s view is that these digital assets stored on the blockchain are subject to state sales and business taxes. Its Department of Revenue will issue an “Excise Tax Notice,” with advice on how to approach the taxation of NFTs.
“Washington’s position on NFTs is exactly what I thought they would say, and several other states will take the same position,” said Scott Peterson, vice president of US tax policy and government relations at Avalara. “NFTs are not that complicated, at least conceptually. What NFTs represent can complicate them when it comes to sales tax. Bulk transactions are always complicated from a sales tax perspective. This isn’t the first time someone has bundled multiple products into one transaction — states have good rules about common examples, such as software bundled with hardware. In other cases, states rely on some form of “essence of the transaction” or other phrase to get the consumer to buy. »
“While the cryptocurrency universe continues to evolve and the potential for new offerings is limitless, these differing perspectives between federal agencies highlight potential inconsistencies and room for a united approach,” Beebe said. .
The administration’s executive order includes six main areas: consumer and investor protection, financial stability, illicit finance, U.S. leadership in the global financial system and economic competitiveness, financial inclusion, and responsible innovation. .
“Developing a central bank digital currency based on the dollar, a digital form of the US dollar, is not officially listed as one of the six priority areas,” Beebe noted. “However, over 100 countries have explored the concept of a CBDC. The executive order elevates the sense of its importance and directs agencies to assess technology infrastructure and design a strategic plan tied to a CBDC.
Is there a CBDC in our future? The possibility exists.
“In January 2022, the Federal Reserve released a study on the benefits and risks of a CBDC,” Beebe observed. “The study does not provide policy recommendations – rather, it aims to foster discussions with stakeholders and invites public comment,” she said. “He has indicated that he will not issue CBDCs unless he has the support of Congress and the executive branch. Additionally, the Federal Reserve has stated that even if a CBDC is issued, it will complement, rather than replace, paper money. The CBDC and paper currency would co-exist.
Despite the underlying security and privacy issues, the executive order recognizes cryptocurrency as a potentially viable form of payment, according to Beebe.
“Instead of prohibiting these transactions, the policy aims to ensure equal and secure access for all,” she said. “He is leading a series of studies and research to continue to explore issues associated with digital assets. Significant policy recommendations will be revealed over the course of the year, as agencies finalize their studies and provide specific policy proposals. The November midterm elections could influence the timing of the implementation of the suggested policies. »
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Crypto Clarification: New Government Regulation Proposals
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