Saturday, July 13, 2024

The U.S. Treasury sets crypto tax rule and Binance faces ongoing legal struggles

Cryptocurrency Regulation Mandates Reporting to IRS and Legal Challenges: A Comprehensive Update

**US Treasury Department introduces regulation requiring detailed reporting on cryptocurrency transactions**

The US Treasury Department has recently established a regulation that will mandate cryptocurrency brokers, including exchanges and payment processors, to provide the Internal Revenue Service (IRS) with comprehensive data on users’ transactions involving digital assets.

This regulation, originating from the bipartisan 2021 Infrastructure Investment and Jobs Act worth $1 trillion, aims to combat tax evasion within the cryptocurrency industry. It is estimated to generate approximately $28 billion in revenue over the span of ten years.

The implementation of this new rule is set to commence next year and will be fully enforced by the tax filing season of 2026. The regulation aligns cryptocurrency tax reporting practices with those applied to traditional assets like stocks and bonds. Following feedback from the industry, the Treasury revised the initial proposal to include a $10,000 threshold for stablecoin transactions and made adjustments to alleviate the burden on brokers, alongside introducing a tiered implementation process.

The cryptocurrency sector responded significantly to the preliminary proposal, submitting over 44,000 comments. Primary concerns raised included the broad definition of “broker” in the proposal and potential invasions of privacy for cryptocurrency owners. The Treasury plans to issue further rules later this year, focusing on tax reporting requirements for non-custodial brokers, including decentralized cryptocurrency exchanges.

One key feature of this new regulation is Form 1099-DA, designed to aid taxpayers in determining their tax liabilities and simplifying gain calculations. Brokers will now be required to furnish these forms to both the IRS and individuals holding digital assets, streamlining accurate tax reporting processes. The Treasury Department underscores the historical tax liabilities associated with digital assets and positions this rule as a means to enhance compliance with existing tax laws rather than imposing new tax responsibilities.

Presently, the IRS mandates that cryptocurrency users report a range of digital asset activities on their tax returns, regardless of whether these transactions resulted in gains. Users are solely responsible for these calculations, with no information currently shared with the IRS by trading platforms.

**Legal challenges and court decisions**

In a related development, Reuters reported that a federal judge has ruled in favor of allowing a significant portion of a lawsuit filed by the US Securities and Exchange Commission (SEC) against Binance, the world’s largest cryptocurrency exchange, to proceed. This ruling, delivered by judge Amy Berman Jackson of the US District Court for the District of Columbia, represents a setback for Binance, as the exchange had attempted to dismiss the case.

The SEC’s lawsuit, filed in June 2023, alleges that Binance and its founder and former CEO Changpeng Zhao engaged in artificial inflation of trading volumes, misappropriated customer funds, failed to restrict US customers from their platform, misled investors regarding market surveillance controls, and facilitated trading of crypto tokens deemed unregistered securities by the SEC. This ruling compounds Binance’s existing regulatory challenges following a $4.3 billion settlement with the Department of Justice and the Commodity Futures Trading Commission in November for violations of financial regulations.

However, the ruling also delivered a partial victory for the broader cryptocurrency sector. Judge Jackson agreed with a previous judge’s assessment that the SEC had not sufficiently demonstrated that secondary sales of Binance’s tokens – those sold by parties other than Binance on exchanges – constituted securities.

This comprehensive update underscores the dynamic regulatory landscape for cryptocurrencies in the United States, encompassing both tax reporting requirements and ongoing legal challenges affecting major industry players.

(Photo by Jievani Weerasinghe)

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