Government Regulation of Cryptocurrency

Governments throughout the world have begun developing regulations for cryptocurrency exchanges. In this post, we will provide an overview of how various U.S. government agencies view cryptocurrencies and what they are doing to prevent their misuse.

The Internal Revenue Service

Digital currency = property
In 2014, the IRS issued Notice 2014-21, which stated that the IRS would treat virtual currency as property and that it would apply the same general tax principles to virtual currency as it does to property transactions. No further guidance has been issued since then.

In the meantime, the IRS-Criminal Investigations Division is actively searching for taxpayers who are noncompliant with their cryptocurrency reporting – from those who fail to report their capital gains from the sale or transfer of cryptocurrency, to companies that have neglected to pay employment taxes on virtual currency they use to pay their employees.

The Securities and Exchange Commission

Digital currency = a security

The U.S. Securities and Exchange Commission (SEC) regulates securities and securities markets, and has indicated that it could apply securities laws to cryptocurrency exchanges and to the wallets (software programs) in which they are stored. The agency is concerned that a number of online trading platforms are providing a mechanism for the trading of digital assets without first registering with the SEC as a regulated national securities exchange or alternate trading system (ATS). It is also actively investigating initial coin offerings (ICOs, or token sales), and subpoenas have been issued to the owners of many cryptocurrency funds.

The SEC advises people who invest in Bitcoin and other virtual currencies to make sure that that the platform they use is registered with the SEC and thus provides them with the protections that they are entitled to under federal securities laws.

The Commodity Futures Trading Commission

Digital currency = a commodity

The U.S. Commodity Futures Trading Commission (CFTC) regulates commodities and commodity markets. Since 2015, the CFTC has identified virtual currency as a commodity over which it has regulatory oversight. It has been actively policing cryptocurrencies, and has filed numerous legal actions against companies and individuals for fraud or manipulation involving cryptocurrency that is traded in interstate commerce.

In one recent case, the CFTC charged Patrick McDonnell (aka CabbageTech and Coin Drop) with holding himself out to be a trading expert and then taking off with his customers’ virtual assets. After a U.S. district judge in New York affirmed that the CFTC had concurrent authority with other state and federal administrative agencies over dealings in virtual currency, McDonnell wrote a letter to the U.S. District Court chief magistrate stating that he did not have the resources to continue fighting the charges brought against him.

Financial Crimes Enforcement Network

Digital currency = money services

The function of the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department is to combat money laundering, terrorist financing and other financial crimes. In 2011, FinCEN expanded the definition of “money services” under its jurisdiction to include “other value that substitutes for currency.” It has been tracking cryptocurrency activities ever since.

In 2013, FinCEN announced that cryptocurrency exchangers and administrators are required to register with and report to FinCEN as Money Service Businesses (MSBs) and otherwise comply with U.S. Treasury regulations. This past March, it added ICOs to its list of targets, making public a letter to U.S. Senator Ron Wyden in which it stated that a developer or exchange that sells ICO coins or tokens in exchange for another substitute currency is a “money transmitter” and subject to the Bank Secrecy Act. This means that developers and exchanges must comply with anti-money laundering and combating the financing of terrorism (AML/CFT) requirements, which include registering with the federal government and collecting information about their customers, among other things.

State regulations

Digital currency = under your state’s jurisdiction

Individual states have also begun to create new or adapt existing regulations to address cryptocurrency exchanges, ethereum tokens, smart contracts, and the general taxation of digital assets.

San Francisco full service tax law firm

The tax lawyers and accountants at Moskowitz, LLP provide proactive legal support to cryptocurrency investors and businesses throughout the United States. We can help you maneuver through the complexities of the developing cryptocurrency regulations, ensure that all your tax reporting is in order, and help you with any contested tax issue that may arise. Contact our San Francisco offices today.