Evolving Taxation of Cryptocurrency Under the Biden Administration
BY: Kaden Killpack, RBFL Student Editor
In the last decade, cryptocurrency investment and exchanges have skyrocketed. Popularity has surged because of the widespread use of the internet, transaction speed, and reliability. Cryptocurrency is bought, sold, mined, and traded over the internet through a network of thousands of computers. There is no centralized server that holds and regulates the cryptocurrency information, called blockchain. This means that a person can access their cryptocurrency and complete transactions from anywhere. These transactions are also reliable because the blockchain is stored on thousands of computers throughout the world. Any error or fraudulent activity that occurs on a computer is simply corrected by the thousands of other networked computers to correct the discrepancy through a process of cross-referencing. Furthermore, most of these transactions can be completed very quickly and conveniently. With all these benefits it is easy understand the increasing demand for cryptocurrency.
This substantial growth of cryptocurrency has shed light on the shortcomings of federal taxation. Despite a robust federal tax system, cryptocurrency taxation and regulation is inadequate to match the relentless growth. It is estimated that in the next decade the failure to effectively tax cryptocurrency will result in seven trillion dollars of lost tax revenue. It was not until 2014 that the IRS provided its first guidance to inform taxpayers on how to deal with cryptocurrency transactions. Still, in 2021, many taxpayers are not aware that cryptocurrency is taxed as property receiving capital gain treatment, nor are they aware of their responsibility to keep detailed and accurate records of their cryptocurrency transactions that are essential for accurate taxation.
In an effort to increase regulation of cryptocurrency and thus increase tax revenue and decrease the tax gap, or the difference between what tax is owed and what is actually paid, the Biden Administration has made several proposals. While some of these proposals are made with the intent to deliberately affect taxation of cryptocurrency, others affect cryptocurrency through their influence on capital gains tax, the current method used to tax cryptocurrency, which affect many other types of transactions as well. Biden Administration proposals that will modify taxation and regulation of cryptocurrency include increased reporting information and requirements from both taxpayers as well as cryptocurrency exchange platforms, increased capital gains tax rate, especially for high-income taxpayers, use of software to record tax pertinent information on transactions, and taxes on unrealized gains.
Through executing these proposals, the Biden Administration hopes to achieve greater tax revenue, clearer guidance to taxpayers on what and how to report their cryptocurrency transactions, and reduction of tax evasion and tax avoidance. In theory, if these proposals are implemented as they are stated, the Biden Administration could see significant decreases in the tax gap, however, it important to note that implementation could also cause taxpayers, especially wealthy taxpayers, the modify their investment strategies to avoid these added tax regulations thereby decreasing the potential productivity of the proposals.
Sources:
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