How are Digital Currencies Regulated in the US?

12 Jun 2018
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Governments around the world are beginning to take sides in the great digital currency debate. China, for example, has placed restrictive and far-reaching bans on digital currency trading, exchanges, and Initial Coin Offerings (ICOs) within the country.

On the other hand, officials in Russia are attempting to pass bills in support of legal digital currency trading.

Today, the U.S. stands somewhere in the middle, as politicians, businesses, regulators, and the general public are beginning to come to grips with the enormous impact that Bitcoin and the blockchain are having.

On one side, several states are exploring or are in the middle of implementing policies that give tax breaks (or collect taxes) for using digital currency. Meanwhile, the SEC is actively pursuing lawyers and marketers in the ICO scene, even though nearly every token sale across the globe now bans U.S. participants. Most ICOs would rather miss out on a few investors than risk a misinterpretation of hazy and nonexistent regulations within the country.

U.S. citizens who are involved in digital currency are perhaps more confused than regulators, scratching their heads at digital currency taxation and investment legalities. People become even more confused when considering digital currency earned through income. And matters become even more complicated when it comes to utility tokens, alternative digital currencies (often called alt coins), and digital currency received as rewards for bounty campaigns.

Because no one truly understands the comprehensive ins and outs of digital currency regulation in the U.S. (regulatory agencies included), the following information is somewhat speculative. However, it is based on information that regulatory bodies have given thus far and it provides a framework to consider where digital currency regulation is likely headed in the near future.

Internal Revenue Service (IRS)

Coinbase, one of the largest and most trusted digital currency exchanges in the world, has recently been asked to hand over the records of specific customers to the IRS.   

One thing is clear: if digital currency remains legal in the U.S., Uncle Sam will want his cut.

What remains unclear for many people is how exactly they are supposed to calculate taxes for their digital currency earnings. In 2014, the IRS released a statement that digital currency was to be treated as property. Citizens have raised questions about how and when to calculate capital gains on digital currency, especially when trading multiple digital currencies. It’s also unclear about how to treat digital currency as payment for products and services. These questions abound for digital currency users in the U.S., and people will want answers before paying taxes or even continuing to participate in the digital currency space.

The IRS’s information regarding digital currency to date is incomplete and somewhat confusing. Two major organizations that have requested published clarification from the IRS regarding digital currency laws are the American Institute of CPAs and the Treasury Department’s Inspector General. It remains to be seen how the IRS will treat digital currency moving forward, but it’s clear that they are trying to come up with ways to make Bitcoin transactions, payments, and income increasingly taxable.

Securities and Exchange Commission (SEC)

The U.S. Securities and Exchange Commission is cracking down hard on digital currency. Their statements have scared away many potential token issuers from any contact with the U.S. or its citizens. ICOs (also referred to as Token Sales) have helped raise billions of dollars for new startups and expansions of pre-existing businesses over the last few years.

Recently, the SEC issued a statement that most (if not all) tokens issued through ICOs would be considered securities, thus falling under U.S. securities regulations. As a result, many would-be token sale holders have provided their information to the SEC for registration rather than risk having to return invested money, thereby halting the sale of their tokens due to cease and desist orders from the SEC.

The SEC also has its eyes on digital currency exchanges, which are presently unregulated and therefore not assured as “safe” by the agency.

Commodities & Futures Trading Commission (CFTC)

The U.S. Commodity Futures Trading Commission currently has the ability to regulate digital currencies (including Bitcoin) thanks to a recent ruling by a federal judge in New York. This has created some confusion for users, as it appears digital currencies are being treated as both securities and commodities with regulation from both the SEC and CFTC. The two regulatory bodies have held meetings in an attempt to clarify one another’s roles in the digital currency sphere, but definitive conclusions have not yet been reached.

Financial Crimes Enforcement Network (FinCEN)

The Financial Crimes Enforcement Network is in the midst of cracking down on ICOs with money transmitter regulations. Although they are working closely with the SEC and CFTC to “clarify and enforce the AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) obligations of businesses engaged in ICO activity,” it remains to be seen what FinCEN’s role in digital currency regulation will be moving forward.

Federal and State Governments

From a federal perspective, it appears that the U.S. is attempting to avoid stifling innovation while at the same time maintaining control under the pretense of investor protection and fair taxation. Many have speculated that current strict (and confusing) regulations are a symptom of bureaucratic disorganization. Or perhaps it’s the product of a government which fears a loss of power and control over its citizens due to the decentralized nature of digital currencies.

From a state perspective, the U.S. looks a bit more hospitable to digital currency enthusiasts. For example, Nevada was the first state to ban blockchain taxes. Arizona recently passed a bill that allows citizens to pay state taxes using digital currency. Wyoming has also sought to allow citizens to pay taxes via Bitcoin and other digital currencies. Georgia wishes to do the same by adding license fees to the list of items payable with digital currency.  

For now, the U.S. is mixed in its digital currency friendliness and seems, even within itself, to be confused by its regulatory intentions. Digital currency is still a very recent technology, and perhaps we will see clarification from U.S. regulatory bodies in the days and weeks to come.