As cryptocurrencies gain more mainstream attraction, it will be no surprise that regulation efforts will follow. But what does that mean for tax & accounting professionals?
Cryptocurrency has expanded beyond its initial nascent phase to become a pervasive asset class that exists throughout today’s financial ecosystem. One might not realize it, but institutions are adopting cryptocurrencies and digital assets at record paces; and trading, buying, and holding crypto is now just as easy as trading any other asset, like stocks or bonds — perhaps even easier.
And perhaps, a little too easy.
In most modern economies, anytime a new asset class presents any level of traction, it can be expected that regulation will follow shortly behind. With crypto, however, while the IRS and other agencies were quick to claim that taxpayers and businesses needed to pay regular capital gains tax on their crypto earnings, concrete regulation on digital assets has not evolved as quickly.
However, all of that’s changing.
Regulation on the horizon
The cryptocurrency bull run of 2020 and 2021 brought crypto even further into the limelight and marked the most significant shift in the asset class’s history towards mass institutional and governmental adoption of certain digital assets. As with any unregulated financial ecosystem, however, it also brought bad actors, massive crashes, scams, and plenty of other stories of financial misdeeds.
As financial leaders now realize and accept that digital currencies are here to stay, regulation is being built and is soon to follow.
In the US, right now the IRS regulation that guides how to process crypto returns is primarily Notice 2014-21, along with an official FAQ posted by the IRS. To say that these documents and standards are “incomplete” would be an understatement. This lack of clear guidance has left many crypto financial experts to release tax guides for investors on the most appropriate way to treat digital assets during the tax filing process.
As financial leaders now realize and accept that digital currencies are here to stay, regulation is being built and is soon to follow.
While working around the IRS’s sparse guidance for filing crypto taxes, regulation is on the horizon that will clarify certain filing requirements. For example, the Infrastructure Bill passed in November 2021 set in motion the process of further regulating digital assets. The Inflation Reduction Act, passed just a few months ago, established significant funding for the IRS to address digital asset taxation policy.
There’s even regulation coming to better facilitate tax information reporting, traditionally done through the issuance of 1099 forms. Now, crypto exchanges will need to issue a customize 1099 form that is specially tailored to digital assets, the 1099 Form-DA (for Digital Assets). Further, since April, there have been a total of three bills introduced to Congress that further address regulation on cryptocurrency and digital assets.
What does this mean for tax & accounting professionals?
All this talk of regulation and subsequent action surrounding cryptocurrencies means that now is the time for tax & accounting professionals to start incorporating digital asset workflows into their tax & accounting systems and practices. Or at the very minimum, they need to expand their knowledge base around digital assets, to the same extent they would for other more traditional assets.
No regulation currently proposed or even hinted at presents the possibility of crypto being destroyed or banned through regulation. And with institutional adoption of digital assets growing, such punitive action is unlikely. Indeed, the world’s financial leaders have become crypto bulls just as much as retail investors.
All this means that bridging the gap between crypto and traditional finance is an ever-growing need for anyone involved in this industry. Yet, alongside this need is another, one for tax & accounting professionals who are willing and able to rise to the challenge that this new asset class presents.
So, what does regulation in crypto mean for tax & accounting professionals? It means it’s time for them to get in that continuing education mindset and ensure that their practice, firm, or business is ready to handle cryptocurrencies and the intricacies that these cutting-edge assets present to investors.
For more on the status of crypto regulation worldwide, check out the full digital version of the Cryptos on the Rise 2022 report from Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence
