Cryptocurrency and Government Regulations

Introduction to Cryptocurrency

A cryptocurrency is a digital currency that is secured by a technique called cryptography which secures communications between senders and recipients from third party entities.

In 2008, the first cryptocurrency was introduced to the world; its name was Bitcoin. Since then, Hundreds of thousands of other cryptos have been created, but to this day, Bitcoin remains the most valuable digital asset by a far margin and also rivals the top ten most valuable companies in the world by market cap.

One of the main purposes for the existence of cryptocurrency is decentralization, which makes it different from all other types of assets when it comes to regulations. So far, no country has been able to control the cryptocurrency space and fully monitor its transactions, making it quite hard for the government to accurately tax every transaction that take place. Nevertheless, they are expecting you to report every single transaction that you have been a part of no matter the amount.

Why are we so focused on Cryptocurrency taxation?

Normally, platforms where you can exchange assets, such as stocks, bonds, etc. are required by the government to report all their users' activities to the IRS and issue tax forms both to the IRS and to the users. The users will use that form to file their tax returns and report their gains and losses.

This is not a feasible option for cryptocurrency due to the fact that one can send and receive crypto assets to and from multiple crypto exchanges or digital wallets. Nevertheless, some exchanges report some of your activities, some report all, and some report none at all.

Here is an example about a crypto trader named Tom:

Tom buys 1 Bitcoin on platform X, but decides to send it to a different platform, called platform Y and just keeps it there. Since platform X and platform Y are two different companies, there is no way that X would know what Tom did with the Bitcoin. So, if platform X were to report Tom's activities to the IRS, then the transfer he made would become a taxable event, where in reality a transfer between your accounts do NOT trigger a taxable event!

Here is what Tom needs to do if Platform X decides to report that transfer to the IRS:

Tom needs to recognize the transfer when filing his crypto taxes if he wants to avoid taxation on a non-taxable event. The reason he needs to recognize the transfer is that a transfer of an asset between your wallets or exchanges do not need to be reported on the IRS Form 8949, but records still need to be kept just to be on the safe side should the IRS decides to audit his claims (he will be in trouble if he cannot back up the claim).