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SEC And IRS Take An Aggressive Stance On Cryptocurrencies

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Cryptocurrency is becoming more and more mainstream everyday. On Sunday night, John Oliver ran a long piece on the cryptocurrency ecosystem, mapping out to HBO viewers the strange vocabulary and insider jokes with which we’ve all been indoctrinated for some time. Any news is good news, and ultimately this should end up being a positive thing for cryptocurrencies that have solid technology and a use. As the mainstream catch wind, regulatory and governments catch up.

On March 2ndCNBC broke a story that the US Securities and Exchange Commission (SEC) - the organization who set out to ‘protect investors’ and ‘maintain fair, orderly… markets’ - took significant action in stepping up the ongoing regulatory rhetoric by subpoenaing approximately 80 cryptocurrency firms.

It’s speculated that this is part of a coordinated effort to pinpoint organizations and individuals holding or thought to be holding significant quantities of cryptocurrency, as the Internal Revenue Service (IRS) have begun targeting exchanges within its jurisdiction only weeks prior – Andreas M. Antonopoulos one such ‘lucky’ Coinbase user informed of the IRS’s handy work.

The SEC are said to be focusing its investigating on the ‘happy go lucky’ initial coin offering (ICO) market. It has offered warnings to potential investors, warnings that for ‘veterans’ now go without saying – to investors going long, each ICO now starts with an onus on the company to prove it is the real deal, as oppose to the investor to disprove it.

SEC & IRS No Longer On The Sidelines

Polemics have turned into action. The noted ramping up of authoritative efforts comes in line with signs of the beginning of a cryptocurrency bear market. However, most markets worldwide are feeling effects of contraction on the back of multiple sources of international uncertainty across sectors (as well as relations).

(Click to enlarge)

Those in the US are seemingly the first to be subjected to this more aggressive strategy by regulators. Until this year, all countries in the West had not dissimilar cryptocurrency taxation and regulation policies: one of a passive nature, imposing reporting obligations on the purchasers. This is now clearly antiquated. It’s unclear how the IRS will use these purchasing records requested, or whether they even will be ‘used’ in the sense of a tangible audit. One possibility is that the requested Coinbase records of 13,000 of its customers will be merely logged and lay dormant; ready for future records and cross referencing.

Related: Bitcoin And Banking: The Next Mobile Payment Revolution

Cryptocurrency Tax Confusion

With this said, a major flaw is how most countries define ‘digital currencies’. It’s as if cryptocurrency is pooled together in a holder’s wallet, and as soon as this is done, the cryptocurrency is somewhat indistinguishable from all past purchases – creating what traders call dollar-cost averaging. This is not unlike Forex trading: anything bought in the past is bunched together to create something new, like dropping more water into the bucket of water.

But given the thus far consistent classification of cryptocurrency as an ‘asset’, akin to something physical like a bicycle or a cupcake, it’s not out of the question for an astute cryptocurrency holder to split these ‘asset’ purchases into groups (despite the clear technical insignificance).

To put it another way, an old ‘Bitcoin’, as in, a coin mined and purchased a few years ago, transaction recorded and all, is in no way any different as a coin mined today or purchased today. It holds the market price. But this transaction - the act of purchasing this coin - well, this transaction (date, time, cost, value) is currently the ‘taxation event’ that the West is interested in. It’s the only way they have been able to get around flat out calling cryptocurrency a ‘currency’ in the legal sense.

Thereby in refusing to call a cryptocurrency a currency, even though it smells like one (besides the central authority), regulators have left the door ajar: cryptocurrency sold today may be ‘claimed’ as cryptocurrency sold at a loss, so long as the ‘loss’ transaction record exists, and irrespective of the dollar-cost average. Related: SEC Cracks Down On Silicon Valley’s “Disruptive Tech”

This is a strange scenario, and one entirely as a result of regulators classifying cryptocurrency as a ‘asset’ instead of incorporating it into a ‘currency’ category. It has the liquidity of currency, but the legal status of non-analagous Beanie Babies.

Even though the SEC is acquiring substantial amounts of data through subpoenas, while the IRS’s efforts to gain transactional information from exchanges, it’s difficult to see how this gaping hole can be patched. If you’re purchasing cryptocurrency regularly, especially if you were caught up in December fever last year, it looks as though any selling now can turn into a tax break.

As for the SEC’s quest to get a handle on ICOs, which are acting like series A start-up funding on steroids, it looks like the ‘asset’ classification plays into its hands. This classification may very well result in the SEC declaring the majority of tokens to be unregistered securities, which will nearly certainly have a horrible effect on the value.

Will any SEC investigations lead to a wider cryptocurrency loss of value? Hard to say. With clarity comes certainty, even if the clear weather brings some cold.

By Con Duncan via Crypto Insider

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