Cryptocurrency, such as bitcoin, is a decentralized digital currency that's gained popularity over the past few years as a potential alternative to paper currency like the U.S. dollar. Recently, in an effort to close the “tax gap,” the United States Treasury Department issued new rules for reporting large cryptocurrency transactions to the IRS. The American Families Plan Tax Compliance Agenda was released on May 20, one day after the Chinese government reissued restrictions on crypto transactions in the country.
Some online users are claiming the move is an effort by President Joe Biden’s administration to make his own crackdown on cryptocurrency.
Can the government shut down cryptocurrency?
- The Department of the Treasury
- Professor David L. Yermack, New York University Stern School of Business
- Joe Carlasare, partner and co-chair of the Cryptocurrency, Blockchain and FinTech group at SmithAmundsen LLC
- Eric Fogel, partner and co-chair of the Cryptocurrency, Blockchain and FinTech group at SmithAmundsen LLC
No, the U.S. government can’t shut down cryptocurrency markets, but they can regulate it.
WHAT WE FOUND
“The only way to ‘shut down’ cryptocurrency is to disconnect the Internet,” Professor David L. Yermack told VERIFY.
“Crypto lives in cloud storage and is operated by software that runs continuously in global networks across thousands of redundant ‘nodes.’ These projects are usually decentralized, with no leadership or central node that can be approached in order to enforce any sort of ‘ban.’ A government might just as well try to ban the sun rising.”
The American Families tax plan would require transactions over $10,000 in cryptocurrency to be reported to the IRS. U.S. law already requires trades and businesses to report cash payments of more than $10,000.
Cryptocurrency is considered “property” for federal income tax purposes and it is treated as a capital asset and one has to continually record any applicable capital gains, even for small transactions, attorney Joe Carlasare said.
“I do not view the requested proposal to report transfers of at least $10,000 of cryptocurrency to the IRS as a move to slow down the market,” he told VERIFY. “The Biden Administration’s chief concern is underreporting of tax obligations. There is public data showing significant underreporting of tax obligations relating to realized gains from cryptocurrency trading. My view is that the IRS is trying to capture that revenue.”
He also said if the government wanted to shut down or slow down the market, “the most draconian steps they could take would be to shut down public cryptocurrency exchanges.”
“By controlling the entrance and exit ramps to exchange local currencies for crypto, it would make it difficult for citizens to buy crypto. However, this is not the approach that most governments are taking. Most governments permit exchanges to operate so long as ‘Know Your Customer’ (KYC) procedures function to assess customer risk and there is compliance with Anti-Money Laundering (AML) laws,” Carlasare said.
Carlasare said we should pay attention to how governments outside the United States are regulating or adopting cryptocurrencies, particularly China and the European Union. The Chinese government recently restated their regulations on cryptocurrency, banning businesses from crypto transactions. A Chinese citizen can still buy or own virtual currency.
“This is a developing industry and there remains legal uncertainty in the space. Cryptocurrencies are here to stay, but we should fully expect that regulators will continue to provide appropriate guidance as this new asset class matures,” Carlasare added.
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