Will New Tax Rules Hinder or Help Cryptocurrency Investors?

Tax changes are coming for crypto investors. Last month, President Biden signed the U.S. infrastructure bill into law. Among a long list of provisions, the new law includes some key tax reporting changes that will impact crypto investors and brokers. For example, under the new law, all cryptocurrency exchanges will be viewed as traditional brokers for the purposes of taxation. In addition, digital assets totaling $10,000 or above will be viewed as cash for the purposes of taxation.

In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Connor Allen, Travis Hoium, and Rachel Warren discuss the impact of tightened regulations on crypto investors, as well as recent clamp-downs by China on the crypto community. 

Connor Allen: Anything that makes people money will be regulated and will be taxed and that can be expected. But about my concern, I’m really not too concerned about it being regulated because I knew that this was always going to happen.

I just want to hit on the point of de-centralization and how big that is for the crypto industry. It’s not about not being regulated. It’s about nobody controlling the money supply. I understand that China might be doing a little bit of that, but being taxed on it, is not the same thing as China cracking down and not allowing mining or not allowing crypto whatsoever.

China gives me a little bit of concern but for the U.S. regulation really nothing to be too worried about. Honestly, I think that the new regulation that we’re seeing gives merit to crypto industry as a whole. The more regulation it has, the more the government believes in this thing. Everybody believes in this thing and so it develops that merit that people have been wanting to see from crypto.

With regulation, everybody will learn to navigate it just as they’ve learned to navigate the regulation in the past on all kinds of asset classes. Now, I’m not a big fan of regulation in general, but I really don’t think it’s going to be huge problem for a lot of crypto investors or anybody that’s in that space.

Obviously one thing is that a lot of regulators might not know a ton about cryptocurrency. That could be a reason for concern. You see some of these things that they’re talking about trying to understand crypto and trying to talk about crypto. You are like, do you know what you’re talking about? It doesn’t seem like they have a good grasp on it.

Especially one thing with Bitcoin ETFs and regulation and all that good stuff is they are allowing a futures Bitcoin ETF to be out there, but they’re not allowing an actual price point Bitcoin ETF to be out there.

That has me a little bit confused why they would allow one over the other. The reason being is that they think it’s a potential danger to shareholders. But on the flip side, you’re going to allow triple leveraged, short ETFs and naked options for a lot of retail investors.

You are going to allow all that, that investors are very open to getting hurt by, but you won’t allow a Bitcoin ETF. There’s a lot of regulation that I’m skeptical off, but nothing that I’m truly worried about.

Rachel Warren: Yeah, for sure. Did you have something else to add on this Travis?

Travis Hoium: One thing to add is, I think as regulation comes into the industry, as investors we need to think about what companies are equipped to adapt to that regulation.

This is where a company like Coinbase, you don’t see them fighting a lot of these regulations. They are sort of cheering them because they have the capital and the infrastructure to adapt to them. I think of it a little bit like this is the same reason that Facebook isn’t fighting regulation.

It’s business because regulation ends up bringing lock-in. If it’s really difficult to meet some of these requirements, it’s going to make it harder for start-ups to disrupt the business like Coinbase, now that Coinbase is nearly a $100 billion business it might be over that now. That’s good news for them. From an investment standpoint, that’s another thing to think about that sometimes regulation is good for stocks.

Connor Allen: They also have those relationships in place already with the regulators too. Sorry Rachel, you can go on now.

Rachel Warren: No. [laughs] Great thoughts from you both. Thank you. Yeah, I agree with you. I think that I understand why investors get a little nervous when they hear, “Ooh, the government is getting involved regulation, what does this mean?”

But at the end of the day, I think that what we’re seeing specifically in the U.S, is designed to help safeguard that portion of the market, but also to help safeguard investors as well. I think that that’s something that’s very important to remember.

I think that it also can help to legitimize and strengthen the industry over the long run. It was interesting because I found an article by the Guardian publication where they were talking about how the International Monetary Fund had put warning of global risks from the unregulated cryptocurrency boom.

One of these issues is that the article said “there are also several high-profile cases of hacking-related theft of customer funds. So far, these incidents have not had a significant impact on financial stability. But as crypto assets become more mainstream, their importance in terms of potential implications for the wider economy is set to increase.”

The other thing where an industry that is not regulated, the concern is that the Wild West of crypto, as it’s been termed, that it creates these gaps for regulators and can open unwanted doors for things like money laundering, the financing of terrorism.

I think there are so many benefits to this from a societal perspective, but also for investors as well. When you have something that’s unregulated, your hard-earned money can also be more at risk.

I think that this is a good thing. I do think you have this constant struggle of technology moving so quickly now we have to digital currency and the laws are so slow to catch up.

Some of these tax codes that might be used to encompass some of these regulations I tend to think might need some updating as we move forward in the years ahead. But I do agree all-in-all this is an excellent move in the right direction.