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IRS Working On Cryptocurrency Taxation

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IRS Working On Cryptocurrency Taxation
IRS Working On Cryptocurrency Taxation

On Oct. 9, 2019, the United States Internal Revenue Service issued Revenue Ruling 2019-24 and a series of frequently asked questions, identifying rules governing U.S. taxation of digital currencies. Taxation in the U.S. is unbelievably complex, but the new IRS guidance takes a step-by-step approach to address some of the most common issues facing holders of digital currency. The basics are as follows: If you hold digital currency and you sell or exchange it, you are subject to U.S. tax. If you are granted digital currency in the form of salary or as a result of a hard fork, you have taxable income. If you receive digital currency as a result of a gift, there is no immediate tax. U.S. taxation of digital currency is limited to U.S. persons. Who is a U.S. person? U.S. citizens, U.S. green card holders and individuals who spend more than 183 days in the country (measured using a formulaic three-year lookback). If that is you, a tax obligation may exist. 

How do you measure your gain or loss from a sale or exchange of currency? It’s the difference between your digital currency cost basis and the fair market value of the property you received in exchange. How do you know what your cost basis is? The FAQs provide detailed guidance, but essentially, the IRS allows two methods for identifying your basis: 1) You can specifically identify the exact currency sold, traced to the ledger, and use the cost of that specific currency to determine your gain or loss. 2) Or you can use the “first in, first out” method, meaning your basis is computed based on the cost of the oldest currency acquisition in your wallet, moving forward in time as you continue to sell currencies.

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What about digital currency provided as compensation for services? That type of distribution is treated as ordinary income, not a capital gain, similar to cash paid in the form of salary and wages. What about cryptocurrency forks? The Revenue Ruling holds that when a taxpayer does not receive units of a new cryptocurrency as a result of a hard fork, the taxpayer also does not have gross income. That is good news. However, when units of new cryptocurrency are distributed (either as a complete currency replacement or split with the new currency being issued but the old currency still valid), the Revenue Ruling holds that the taxpayer has accession to wealth and therefore has ordinary income. 

The amount included in gross income is equal to the fair market value of the new cryptocurrency measured as of the date that the distribution (usually via airdrop) is recorded on the distributed ledger. While the IRS materials provide much-needed guidance, there are some concerns about unexpected hard forks. Many times you find out about a hard fork after the fact. Nevertheless, the IRS takes the position that taxpayers must track and account for hard fork transactions. Thus, it places the burden on individuals to watch their wallet and trace activity throughout the year. Also, there is no “de minimis” exclusion. Meaning, every transaction involving digital currency must be reported. What about the purchase of a cup of coffee with crypto-cash? This payment gives rise to a taxable exchange. The value of the coffee you just bought less the basis in your currency you provided must be computed and reported to the IRS as a gain or loss.

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Maylasian Cash Transaction Limit Set to $6K – Will This Push People Into Crypto?

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Maylasian Cash Transaction Limit Set to $6K - Will This Push People Into Crypto
Maylasian Cash Transaction Limit Set to $6K - Will This Push People Into Crypto?

Malaysia is planning to impose a $6,000 limit on cash transactions in 2020, according to a deputy governor at the country’s central bank. The new restrictions aim to prevent the use of cash in illicit activities, and won’t affect regulated financial institutions or other entities transacting for humanitarian aid purposes.

Abdul Rasheed, the deputy governor in question who works for Bank Negara Malaysia (BNM), claimed that the measures will apply to all transactions involving physical cash, including payments for goods and services, reports local English-language newspaper The Star. The limit of 25,000 Malaysian ringgits ($6,048) will also apply to donations and transfers between entities like people and businesses, the report notes. According to Rasheed, who also serves as chairman at the National Coordination Committee to Counter Money Laundering, most Malaysian households spend around 8,000 ringgits ($1,935) per month. Rasheed also noted that the fines for violating the proposed measures will not exceed three times the amount of the committed offense.

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Rasheed highlighted the need for a cash transaction limit in the country, given the anonymous nature of cash transactions. In a report by local publication The Edge Media Group, Rasheed said:

“Cash remains widely exposed to abuse by illegal activities. As such, this measure targets large cash transactions that are at higher risk of being abused. This is also not to hinder legitimate cash payments for goods and services — most of which are for small ticket items.”

Citing similar practices adopted by Indonesia, Rasheed expressed his willingness to collect public feedback on the matter. He noted that a public policy usually takes about six months before being imposed. In August 2019, the Australian government introduced a bill that proposed to ban cash transactions over $6,900, including those transactions involving digital currencies. More than 7,000 people subsequently signed a petition against the proposal.

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Australian Home Affairs Minister Says Terrorists Use Crypto In Crimes

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Australian Home Affairs Minister Says Terrorists Use Crypto In Crimes
Australian Home Affairs Minister Says Terrorists Use Crypto In Crimes

The Australian Minister of Home Affairs Peter Dutton warned that terrorists are exploiting cryptocurrencies to “fund their deadly missions.”

During a counter-terror conference in Melbourne on Nov. 7, Dutton said that the anonymity of cryptocurrencies allow extremists to avoid scrutiny. He stated that the increased use of digital currencies, stored-value cards, online payment systems and crowd-funding platforms may provide new channels through which terrorism can be financed, adding:

“The anonymity afforded by such technologies enables terrorist financiers to obfuscate their activities.”

Dutton, who leads the Department of Home Affairs, which is responsible for immigration, border control, domestic security and law enforcement, further said that nations across the globe need to stay ahead of modern financing measures and embrace expertise from outside governments. 

The Minister also turned his scrutiny toward charities and not-for-profits, claiming they had become popular terror financing conduits and that often these organizations are not even aware that they are being manipulated for such use. Dutton has recently been the target of criticism in his home country, after claiming that climate activists should pay for the cost of police response to protests, and opposing a bill that would streamline medevac laws.

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In September, during the 19th Annual International Conference on Counter-Terrorism, United States Treasury Undersecretary Sigal Mandelker stated that cryptocurrencies could become “the next frontier” in the war on terrorism. She said:

“Terrorist organizations and their supporters and sympathizers are constantly looking for new ways to raise and transfer funds without detection or tracking by law enforcement.  While most terrorist groups still primarily rely on the traditional financial system and cash to transfer funds, without the appropriate strong safeguards cryptocurrencies could become the next frontier.”

Earlier in June, the governor of the Philippines’ central bank, Benjamin Diokno, made similar warnings against the potential use of cryptocurrencies for terrorism financing and underscored that the Bangko Sentral ng Pilipinas (BSP) will continue to closely monitor their use in the country. Since the beginning of 2017, BSP has required domestic crypto exchanges to register as remittance and transfer companies and implement specific safeguards — covering anti-money laundering, risk management and consumer protection.

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Russia Introduces A New Law Where Police Can Confiscate Bitcoin

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Russia Introduces A New Law Where Police Can Confiscate Bitcoin

Russia is planning on creating legal statutes allowing the government to achieve the impossible: confiscation of Bitcoin (BTC). As local financial news outlet RBC reported on Nov. 7 citing sources familiar with the matter, Russia’s interior ministry will work with various state organs to draw up the plans, which could enter into law in 2021.

The push does not single out Bitcoin, but instead refers to “digital assets” as a general phenomenon, chief among which are cryptocurrencies, says RBC. The publication quoted Nikita Kulikov, head of a dedicated committee at the Russian parliament, as explaining:

“The constant growth trend in crimes using virtual assets, and the lack of consumer protection in the face of this kind of criminal onslaught, naturally dictate the need to develop mechanisms for legal regulation and control of virtual asset exchange.”

Among the options under consideration is the creation of a government cryptocurrency wallet for transferring funds.

Russia has yet to implement its long-awaited package of laws regarding cryptocurrency, which has seen multiple delays. According to various parties speaking to RBC, crypto would need legal recognition before the government could justify legal grounds to confiscate it as part of judicial proceedings. 

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As with other countries’ attempts, however, the way authorities would take control of investors’ holdings remains unclear. In theory, RBC notes, crypto held on exchanges could be accessed if the exchange in question complies. 

For coins held in wallets to which the investor holds the private keys, the method of acquisition is a mystery. The plans thus speak to a potential lack of understanding of how decentralized cryptocurrencies such as Bitcoin operate. India’s recent recommendation to ban them faces similar difficulties: effectively attempting to control the uncontrollable. 

At the same time, Russia appears permissive to other facets of cryptocurrency. One of President Vladimir Putin’s aides has revealed he wants to control 20% of Bitcoin mining production from a new farm located in the country’s northwest.

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