U.S. Crypto Regulation: Soon After the Executive Order
President Joe Biden signed an Executive Order on March 9, 2022, which mainly focuses on the development of digital assets and their inclusion in the legal zone. The Executive Order's main objective is to ensure the responsible development and deployment of crypto assets. The notion of "responsible" refers to the consumer, business, investor protection, financial stability, prevention of illicit finance, and U.S. leadership in the global financial system within this Order.
In this piece, we will focus on the actions taken by the Biden administration to setup the current and possible outcomes of the strategy set out by the Executive Order.
Following the Executive Order, Fiscal Year 2023 Budget ("FY 2023") was proposed by Joe Biden on March 28, 2022. In this proposal, it is observed that a new volume of tax at the value of $ 10.9 billion on digital assets seems to be applied in the long term.
The FY 2023 outlines the roadmap for fairer taxation, which can encourage investment in the U.S., prevent shifting jobs and profits abroad, and ensure that corporations and high-income individuals are taxed fairly.
In the FY 2023, the objectives related to digital assets can be listed as follows:
Modernizing the rules that enable loans of securities to be treated as tax-free—This objective aims to include the income earned through digital assets in the area of taxation. For example, the lender's revenue in exchange for lending the digital asset will be taxed if the lender keeps the loaned asset.1 This proposal will be effective for taxable years beginning after December 31, 2022.2
Enhancing reporting requirements for financial institutions and digital asset brokers— FY 2023 aims to enhance the reporting mechanisms to apply the proposed taxations efficiently. The Foreign Account Tax Compliance Act (“FATCA”) already envisages certain reporting duties for foreign financial institutions regarding U.S. accounts. Now the proposal sets forth a reporting duty concerning digital assets for certain financial institutions.3 Reporting the account balance for all financial accounts maintained at a U.S. office and held by foreign persons is included within the proposal’s scope.4 For example, the digital asset brokers will be obliged to report the information regarding the passive entities holding digital assets and their foreign owners.5 This objective is regulated to be effective after December 31, 2023.6
Expanding the scope of reporting by certain taxpayers—The objective aims to include the new category of assets in the taxation regime. Accordingly, the accounts holding digital assets obtained by a foreign digital asset exchange or other foreign digital asset service provider need to be reported if the total of the assets including this proposed new category, exceeds $ 50,000, which may be subject to an increase by the Secretary.7 This proposal will be effective for returns required to be filed after December 31, 2022.8
Amending mark-to-market rules for dealers and traders—The proposal aims to apply the mark-to-market method for the actively traded digital assets and derivatives.9 The Secretary of the Department of Treasury and her delegates will be authorized to determine the notion of "actively traded digital asset". 10When determining actively traded digital assets, the Secretary may consider whether the asset is regularly bought and sold for U.S. dollars or other fiat currencies .
Although a digital asset will not be treated as a security or commodity in terms of mark-to-market treatment under the rules applicable to the new category of digital assets, this will not affect the treatment of a digital asset as a security or commodity for the purposes of securities law or commodity law. This proposal will also be effective after December 31, 2022.11
The takeaways from these proposals may be listed below:
The U.S. aims to provide certainty for the transactions that enable the liquation of crypto assets12 by recognizing its financial effects and regulating tax requirements.
The U.S. seeks a way to eliminate tax havens13 by increasing its scrutiny over digital assets and their foreign holders in order to expand its jurisdiction in the global financial system.
What’s next?
The Executive Order involves orders for many state organs to take action, including drafting reports and proposals regarding the issues envisaged thereof; for this reason, we will witness further actions regarding digital assets in the upcoming months.
Although it is hard to foresee the future and applicability of these proposals due to the political atmosphere in Congress,14 these proposals demonstrate how issues concerning digital assets may turn out.
As for now, with the help of the Vircon Legal News Series, we aim to provide businesses and investors dealing with digital assets to follow the concrete and possible consequences of the Executive Order and FY 2023 closely for their next steps.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.
PWC, Treasury releases “FY23 Green Book” describing President Biden’s tax proposals for businesses, April 2022, accessed via https://www.pwc.com/us/en/services/tax/library/treasury-releases-fy23-green-book.html on May 9, 2022.
PWC, Treasury releases “FY23 Green Book” describing President Biden’s tax proposals for businesses, April 2022, accessed via https://www.pwc.com/us/en/services/tax/library/treasury-releases-fy23-green-book.html on May 9, 2022.
Hobson, Julius: President Biden’s Digital Revenue Proposals, April 21, 2022, accessed via https://www.jdsupra.com/legalnews/president-biden-s-digital-revenue-1950477/ on May, 10, 2022.