Enthusiasm about crypto is big and growing exponentially. Last November, digital assets surpassed a $3 trillion market cap,1 up from $14 billion just five years prior, with roughly 40 million people having invested in, traded or used cryptocurrencies.2 Countries are curious about digital assets too. Over 100 nations are exploring or piloting a digital form of their country’s sovereign currency.
But it’s not just the asset class, or any newfangled currency, that’s causing excitement.
News of new applications for crypto technology continues to crop up in surprising places. Ranchers in Wyoming are using cattle tracking non-fungible tokens (NFTs) to identify individual steer, prove ownership and trace each one through the supply chain.3 Artists are using this same NFT technology to sell digitized art to new audiences.4 And a group of investors—in consultation with the giving platform Endaoment—tried to purchase a copy of the U.S. Constitution at a Sotheby’s auction using donations of Ether, a popular cryptocurrency.5 If present trends continue, crypto technology will be integrated into more and more sectors of the economy while continuing to collect new investors and users.
Reporting Requirements
We’ve already seen digital assets begin to be folded into the Tax Code. For 2021, the Internal Revenue Service added a newly worded question about crypto right at the top of the Form 1041 about selling, exchanging or otherwise disposing of crypto for purposes of taxing the gain.6 In November, Congress also used the Infrastructure Investment and Jobs Act to add new reporting requirements for digital currency brokers. The intent behind these new rules was to add some transparency because sunshine can be a good disinfectant.
Tax Liability
These new reporting requirements have investors and advisors looking for ways to reduce tax liability, which may be uncharted territory for some upstart crypto holders. Based on how this tax filing season goes, we may see additional rules and tools given to the IRS to help further close the tax gap between what’s owed on crypto and what’s collected. We might also finally see guidance from the IRS on how to treat NFTs—as an investment, like crypto, with a top tax rate of 23.8% on earnings, or as a collectible with a top tax rate of 31.8%.
All this focus on tax liability is perhaps one reason crypto giving has ballooned this year. Remarkably, Fidelity Charitable, one of the nation’s largest grantmakers, reportedly took in over $330 million in digital assets in 2021, up from about $30 million in 2020. Intermediaries like Endaoment and The Giving Block are popping up to facilitate giving and accepting crypto donations for donors and nonprofits. Crypto donors are giving big gifts too. The Giving Block reported an average donation size of nearly $10,500 in 2021.7
Proposed Legislation
Unsurprisingly, this fast growing asset class hasn’t only caught the tax community’s attention. Congress has responded with multiple hearings on a wide range of issues, from whether to require depository insurance for certain entities, to addressing concerns over crypto mining’s environmental impacts, and members have begun writing bills to put Congress’ mark on the space.8
Adhering to conventional wisdom, Democratic lawmakers are pressing for more robust consumer protection laws. Cryptocurrency skeptics like Sen. Elizabeth Warren (D-MA) and Sen. Sherrod Brown (D-OH) argue that the public needs to be protected from the risks they say cryptocurrencies pose. Meanwhile, their Republican colleagues generally tend to favor a lighter regulatory approach.
How Congress will manage competing priorities —protecting consumers while encouraging innovation—remains to be seen. Up to this point, no comprehensive legal framework has been formally proposed on Capitol Hill. However, a bipartisan effort to write a comprehensive regulatory framework for crypto markets is underway in Sen. Cynthia Lummis (R-WY) and Sen. Kirsten Gillibrand’s (D-NY) offices.9
The Gillibrand/Lummis effort is noteworthy. As is often the case before a midterm election, we’re seeing congressional lawmakers focus on domestic and pocketbook issues. So in a political moment that often results in splits along party lines, Sens. Gillibrand and Lummis’ coordination stands out. While it’s difficult to see the path to enacting the bill this year, even if it’s introduced within the next few months as suggested by the sponsors, the well-funded lobbying campaigns by those with direct business interests suggests that the time to get a seat at the table is here. And as the old saying in Washington goes, if you’re not at the table, you’re on the menu.
Executive Order
The administration is feeling the heat from crypto too. Back in early March, President Joe Biden signed a sweeping executive order directing a slew of government agencies to coordinate on a regulatory framework for digital assets. According to the executive order, “[t]he rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk.”10 If the myriad bills in Congress weren’t enough, the executive order, which calls for a whole-of-government regulatory framework, is being heralded by the crypto industry as the much anticipated recognition that digital assets aren’t a fad but here to stay.
While the executive order declines to put one individual or department in charge of crafting an interagency regulatory plan, Treasury Secretary Janet Yellen recently sounded a call for a big tent approach. In a statement released just after President Biden signed his executive order, she notes that Treasury’s work will “…be guided by consumer and investor protection groups, market participants, and other leading experts…” as Treasury works to “…promote a fairer, more inclusive, and more efficient financial system…”11 Sounds to us like an invitation for meaningful dialogue.
Shaping the New Frontier
With so much at stake for investors, business executives, wealth advisors, philanthropists and charities, an invitation from lawmakers and regulators to help shape the global governance of digital assets and the new technological frontier for now and generations to come should come to you as a clarion call. Or at the very least should make you wonder what you may be missing out on.
Endnotes
1. https://fortune.com/2021/11/09/cryptocurrency-market-cap-3-trillion-bitcion-ether-shiba-inu/.
4. www.cnbc.com/2022/03/13/this-42-year-old-artist-made-over-738k-in-32-minutes-selling-nfts.html.