Taxation May Be a Bigger Issue in Crypto Regulation Than Anticipated

One of the biggest obstacles for institutions, investors, individuals, entrepreneurs in the United States and overseas to use blockchain and crypto assets, either for payment purposes or for other hedging opportunities, is the lack of transparency around how these assets are going to be treated, Sean Stein Smith, professor of economics at Lehman College, told PYMNTS on the need to have adequate financial regulation for crypto assets.

In the U.S., different regulators, the Securities and Exchange Commission (SEC) and the Commodities Future Trading Commission (CFTC), have different points of view on how to treat, how to value or how to tax assets. According to Stein, it is necessary to “have better transparency and then try to create an ecosystem or an environment where organizations and individuals can use crypto and have the confidence that by doing so, they aren’t accidentally going to trip in some policy or on compliance issues in the future.”

Interestingly, for Stein Smith, the best way to regulate crypto assets would be with a comprehensive piece of legislation, but in his view, this is unlikely to happen with all the elements, products and agencies involved. “Crypto is not just cryptocurrencies or stablecoins. Crypto is an overarching umbrella term that has ICOs (initial coin offerings) SEOs, crypto privately issued coins and NFTs. So trying to be a hone in, on every single iteration isn’t going to work,” said Stein Smith.

However, one area of particular concern for Stein Smith is taxation. How are these assets going to be treated from an income tax perspective? “Right now, in the U.S., anytime that any crypto, be it bitcoin or any other, is used in a transaction, buying anything, paying for anything, being paid in those items, that creates an income tax payment obligation. And so ultimately that ongoing constant source of friction and then income tax obligations is a big headwind that is keeping crypto, I believe, from a mainstream payment option,” he said.

Tax issues will likely be resolved over time, but one of Stein Smith’s worst nightmares when it comes to regulation is that this issue is unchanged. That would mean that any transaction whether it is $8 or $8 million will be subject to the same income tax compliance, filing and payment obligations. To make things worse, a recent bill that will enter into force in 2024 added a clause to an existing IRS code line which basically makes noncompliance with the rules, a felony punishable by time in jail.

Another issue that raises some flags for Stein Smith is the impact private stablecoins and central bank digital currency (CBDC) could have in the dominance of the dollar as an international currency. “While the rise of private stablecoins is great for the development of blockchain and other crypto of technology, ultimately the Congress and the federal reserve do have to be more proactive, do have to move quite a bit faster on this topic,” he said.

Read more: US Draft Bill on Stablecoins Offers Safe Harbor for Issuers

This interview is based on an article that can be found in the TechREG Chronicle, our monthly journal that features articles from experts on technology regulation to drive discussion and debate. To receive this publication, subscribe here.

Sign up here for daily updates on the legal, policy and regulatory issues shaping the future of the connected economy.