United States Cryptocurrency Regulations

Ever since Bitcoin (BTC) hit its all-time high of approximately $20,000 in 2017, interest in blockchain technology in the United States has exploded. In recent years, a growing number of cryptocurrency investors and blockchain firms have entered the U.S. market. 

The Securities and Exchange Commission (SEC) has a blanket classification of all cryptocurrencies as securities. In contrast, the Commodity Futures Trading Commission (CFTC) refers to BTC as a commodity and the Treasury as a currency.

Legislators and government agencies in the U.S. are becoming increasingly interested in cryptocurrency regulation in 2021. U.S. lawmakers focus on a few critical points in crypto regulation: preventing cryptocurrency crime and tax evasion, regulating stablecoins and exploring investment vehicles like crypto ETFs and other funds. Regulators can help protect investors from scams in the crypto space.

Ready to invest in cryptocurrency? Learn more about the United States cryptocurrency regulations now.

Is Cryptocurrency Regulated?

There is considerable progress in developing federal legislation governing cryptocurrencies in the United States. FinCEN (Financial Crimes Enforcement Network) does not consider crypto to be legal tender. 

However, it regards cryptocurrency exchanges as money transmitters as the crypto tokens are value used as a substitute for money. Cryptocurrencies are classified as property for federal income tax purposes by the Internal Revenue Service (IRS), and tax guidance is issued accordingly.

U.S. crypto exchanges are subject to the Bank Secrecy Act (BSA) and require registration with the Financial Crimes Enforcement Network (FinCEN). Additionally, they must comply with anti-money laundering (AML) and anti-terrorism financing (CFT) requirements. 

Cryptocurrency exchange service providers need to obtain FINCEN licensing, implement an AML/CFT and sanctions program, maintain relevant records and submit reports to the authorities.

How is Bitcoin and Cryptocurrency Taxed?

Cryptocurrencies are considered property for federal income tax purposes, meaning that the IRS treats them as capital assets. When you purchase a capital asset, you establish a basis equal to acquisition cost. To determine whether you have a capital loss or gain, you compare your net sales proceeds with your original cost. 

A capital gain occurs if the proceeds exceed your original cost basis. When reversed, a capital loss is locked in. Whether your profits or losses are short-term or long-term will determine how much crypto taxes you must pay.

Short-term capital gains and losses occur when you buy and sell an asset within 365 days. You will recognize either a short-term capital gain if it sold for a higher price or a short-term loss if it sold for a lower price. In 2021, the IRS will have seven tax brackets for ordinary income ranging from 10% to 37%.

A capital gain or loss is a long-term capital gain or loss that results when you purchase an asset and sell it after 1 year. You will generally pay less tax on a long-term gain than on a short-term gain. There are currently 3 tax rates for long-term capital gains: 0%, 15% and 20%. Your tax rate will depend on your income level.

Take Profits With BlockFi

You can cash out your appreciated cryptocurrency without paying capital gains taxes by getting a fiat loan. If you receive a loan based on a cryptocurrency deposit in a lending platform like BlockFi as collateral, this is not taxable income. The process is similar to getting a home equity line of credit, where you provide the bank with collateral for cash against the appreciated value of your home.

Expenditure of the cash received is also not taxable. The proceeds may be used for any purpose you choose. Please keep in mind that if you cannot repay the loan, that will result in a taxable event. For the cash loans against your crypto, lending platforms charge you an annual interest rate of about 5%. 

If you use the loan proceeds for investment or business purposes, you can deduct the interest expense from your taxes. Please note that if you use the proceeds from your crypto loan to pay for personal expenses such as groceries, furniture, or a car, interest expenses would not be deductible. Receiving the collateral back after repaying the loan is not a taxable event, even if the asset you have pledged as collateral appreciates.

Is Cryptocurrency Regulation Bad?

Legislators in the United States are focusing on a few issues in regards to crypto regulation. A cryptocurrency crime and tax evasion provision would include crypto exchanges within the definition of a brokerage firm. By implementing the change, increased tax reporting responsibility will increase to assist the IRS in tracking crypto tax evasion. 

By 2024, the infrastructure bill would require companies that facilitate crypto trades to report tax information about those trades to the IRS (just as traditional investment brokers do) to comply with tax laws. Overall, the bill is favorable to investors since it simplifies complying with crypto tax laws. Upon passage of the bill, exchanges will need to provide investors with 1099-B tax forms containing information regarding their cost basis for investment.

Stablecoin regulation is also an area of concern and may help reduce the problem of tax evasion. Using stablecoins and circumventing the involvement of the dollar may help bad actors evade sanctions designed to prevent money laundering and ensure tax compliance. Investors need to select a cryptocurrency exchange that maintains compliance with evolving federal and state regulators in the United States in anticipation of any upcoming guidance.

Best Regulated Cryptocurrency Platforms

Conventional trading platforms for traditional financial assets are strictly regulated, whether officially classified as exchanges or alternative trading systems (ATS). Many cryptocurrency exchanges like IKBR, Coinbase, eToroX and Webull claim they have regulated status. However, they have a patchwork of regulation in some cases, and sometimes it is entirely absent.

Interactive Brokers (IBKR) is an agency-only, direct market access broker that provides execution, clearance, settlement and prime brokerage for customers. As a U.S. registered broker-dealer, IBKR is subject to the Securities and Exchange Commission, the Financial Industry Regulatory Authority and the rules of the various securities exchanges in which we trade.

Among the most popular cryptocurrency exchanges, Coinbase complies with all laws and regulations in each jurisdiction in which it operates. In addition to being registered with FinCEN as a Money Services Business, Coinbase must comply with The Bank Secrecy Act, which requires Coinbase to verify customer identities, maintain records of currency transactions for up to 5 years and report certain transactions.

XRP vs. SEC Lawsuit

According to the SEC, Ripple Labs’ XRP token is not a virtual currency but rather publicly-traded security. The Ripple platform offers global payments for its XRP token and decentralized ledger to over 2 million users worldwide. 

Ripple Labs has avoided regulations governing the sale of business equity. The SEC filed a lawsuit against Ripple and 2 of its executives for 7 years of distributing XRP, which the SEC described as an unregistered security.

The lawsuit caught Ripple by surprise and added more confusion to an already convoluted regulatory conversation over whether cryptocurrencies should be considered securities, commodities, or something else. Ripple believes that XRP is not a security, and it does not require approval from the SEC. The SEC allows other cryptocurrencies, such as Bitcoin and Ethereum, to trade as commodities because their blockchains are not currently required to register as securities.

According to the SEC, Ripple is different because XRP is actively used to fund the company’s operations and is thus effectively an investment in Ripple. It is considered a security and not a commodity and falls under the jurisdiction of the Securities and Exchange Commission under a precedent referred to as the Howey Test. 

According to legal documents, the lawsuit has been detrimental to Ripple’s business, resulting in XRP being delisted from more than 50 exchanges and causing its value to plummet. Ripple’s case has significant implications. As the law becomes more convoluted, several crypto companies may outsource their digital payment businesses overseas with a much softer attitude toward cryptocurrencies.

Recent Cryptocurrency Regulations

Legislators in the United States are focusing on a few issues in regards to crypto regulation. A cryptocurrency crime and tax evasion provision would include crypto exchanges within the definition of a brokerage firm. By implementing the change, increased tax reporting responsibility will increase to assist the IRS in tracking crypto tax evasion. 

By 2024, the infrastructure bill would require companies that facilitate crypto trades to report tax information about those trades to the IRS (just as traditional investment brokers do) to comply with tax laws. Overall, the bill is favorable to investors since it simplifies complying with crypto tax laws. Upon passage of the bill, exchanges will need to provide investors with 1099-B tax forms containing information regarding their cost basis for investment.

Stablecoin regulation is also an area of concern and may help reduce the problem of tax evasion. Using stablecoins and circumventing the involvement of the dollar may help bad actors evade sanctions designed to prevent money laundering and ensure tax compliance. Investors need to select a cryptocurrency exchange that maintains compliance with evolving federal and state regulators in the United States in anticipation of any upcoming guidance.

Is Cryptocurrency Safe?

The benefit of blockchain technology is that Bitcoin and other cryptographic transactions provide more security than other types of digital transactions, including online banking, transfers via digital wallets and peer-to-peer transactions. The platform is so safe that some individuals who invested in Bitcoin years ago have lost their passwords and cannot retrieve them. This would not occur with a regular bank account or peer-to-peer payment service, which provides methods for resetting your online banking password to gain access to your money. 

However, cryptocurrencies are volatile inherently, which means owning digital assets involves risk. Token prices may undergo a sharp downward correction at any time, so it’s always best practice not to take risks you can’t afford to lose.