Since our launch in 2018, the top priority of the Blockchain Association and its members has been working with legislators and regulators to bring clarity to when U.S. securities laws apply to cryptocurrencies. For example, we supported the introduction of the Token Taxonomy Act, which would define the term “digital token” and exempt such assets from U.S. securities laws. Properly defining these assets is vital if the broader open blockchain economy is to grow to its full potential here in the United States.
We believe that if certain tokens are sold to investors prior to the development of a system in which they can be used, the tokens could be deemed securities, and issuers of these tokens could be required to comply with securities laws in order to protect potential investors.
We believe that digital tokens usable on functional, public, and decentralized blockchain networks have their own inherent value if they can be exchanged for goods or services. These tokens’ value is independent of the efforts of the entity or people that created the underlying blockchain network. Under these circumstances, the tokens are not investment contracts and should not be designated as securities.
Investors, network participants, and developers need to know with certainty that tokens in functional, decentralized networks are not securities in order for innovation to occur where it should — the United States.
Simplifying Tax Reporting for Consumers
We believe that establishing a tax reporting procedure for cryptocurrency transactions will help consumers determine their tax liability and enhance compliance with U.S. tax laws. In 2014, the IRS deemed virtual currency to be property, which means that holders and users of cryptocurrency must determine if there is a gain for each transaction. Unlike other some other assets, there is currently no mandated reporting to help consumers determine their tax liability. Unclear procedures for tax reporting for virtual currency are a stubborn barrier for broader consumer and investor engagement.
The Blockchain Association and its members are working with the Department of the Treasury, the Internal Revenue Service (IRS), and Congress to establish a reporting system through which consumers and the IRS receive better information about tax liabilities.
Including Cryptocurrencies in the De Minimis Exemption
Congress should expand the de minimis exemption for foreign currency transactions to include cryptocurrencies. Under current U.S. law, any gain resulting from a personal transaction using foreign currencies are exempted from an individual’s taxable income so long as the gain is less than or equal to $200. However, cryptocurrencies do not enjoy this common-sense exemption.
Any gain realized from a transaction using cryptocurrency must be reported as taxable income regardless of the purpose or size of the transaction. In practice, this means that when you buy an apple using cryptocurrency, you’re legally obligated to calculate and report any gain or loss realized from the time you purchased the cryptocurrency to the time you bought the apple.
Today, many of the imaginative business models that innovators are developing in the blockchain industry become untenable under the weight of this type of tax treatment. Open blockchain networks promise to enable these new business models by providing efficient payment rails that don’t currently exist for traditional fiat currencies. Requiring users to track gains and losses on each micro-transaction they engage in across dozens of different digital currencies significantly erodes these efficiency gains.
Concerns regarding the integrity of cryptocurrency markets are a hurdle to mainstream and institutional adoption of digital assets, in addition to being a key concern for regulators. To improve market integrity and provide consumers the confidence they deserve, Congress may need to enact legislation to support the orderly and secure functioning of crypto markets. Such legislation could expand the Commodity Futures Trading Commission’s (CFTC) authority to include the regulation and oversight of digital commodity exchange markets.
To access the virtual currency marketplace, consumers rely on virtual asset trading platforms, often referred to as “exchanges,” that match buyers and sellers of virtual currency, performing functions similar to traditional stock exchanges, private trading venues, and broker-dealers.
However, unlike those legacy players, crypto exchanges must navigate a labyrinthine patchwork of state-by-state regulatory frameworks in order to operate across the United States. This convoluted and inefficient process creates significant barriers to entry for new exchanges, imposes a complicated compliance burden for existing exchanges, inhibits uniform regulation of digital commodity exchanges, and complicates consumers’ ability to understand the oversight of the exchanges they choose to use. Consumers and cryptocurrency exchanges deserve a clear regulatory framework, the establishment of which would ultimately enhance market integrity and drive consumer adoption of cryptocurrencies.