The cryptocurrency space has been on the grayer side of the financial space since its conception. But with bitcoin and the traditional financial and crypto sector in general getting more intertwined, the government now seems to have found a way for cryptocurrency to be taxed.

The past year has been difficult for cryptocurrency. Collapses from big industry players like Three Arrows Capital, Celsius, and just recently FTX had a strong effect on how much the government is now paying more attention to the crypto industry. 

Although cryptocurrency is already being taxed through capital gains tax, there is no specific regulation that taxes cryptocurrencies directly, only the gains made on trades. In the early half of 2022, the Department of Treasury released the “Green Book” or their tax policy proposal. 

One section of the proposal is entirely dedicated to bitcoin and cryptocurrency brokers and how digital assets should be taxed. In a nutshell, the Treasury’s proposal will:

“Require certain financial institutions to report the account balance (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) for all financial accounts maintained at a U.S. office and held by foreign persons.” 

This is because of FATCA or the Foreign Account Tax Compliance Act which basically monitors possible illegal financial moves by legal U.S. entities. The proposal, if enacted into law, will not only make the U.S. have access to information on American-held assets, it would also allow the country to share financial information on non-American accounts with partner jurisdictions. 

However, there is no evidence yet that the proposal has been changed or not since the Treasury has been quiet ever since. 

Cryptocurrency regulation is not new. Just this week, Italy passed a law that requires traders to pay capital gains taxes just like the one in the United States. Regulation on emerging markets has been growing stronger, which leaves the question of what Uncle Sam would do. 

With the wounds still healing from the past year’s devastating bear market, the U.S. Federal Reserve might be holding off on a major announcement. This might be because of the current fear, uncertainty and doubt (FUD) surrounding the cryptocurrency market right now. 

An announcement that bitcoin would be directly taxed now might put downward pressure on the crypto market. With that said, a regulation like that strikes against the core tenet of crypto which is decentralization. 

But if the U.S. government can make the policies clear, it might spark new interest in bitcoin and the cryptocurrency industry as a whole and help it grow.

However, it remains to be seen what politicians will do to make the country competitive in the crypto market. 

As of writing, Bitcoin is trading at $17,211, up 3.6% in the last seven days, data from Coingecko show.

-Featured image: BioEnergy Consult

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