Crypto in Trouble?
The incredible rise in cryptocurrency prices this year has cooled off during the summer months as a divergence in sentiment between investor groups has shaken the market.
After topping over $64,000 in April, bitcoin briefly dropped down below $30,000 and has since rallied to over $40,000 in late July and early August.
Recently, a hidden cryptocurrency provision was discovered in the $1 trillion Senate infrastructure package that has left some investors worried that the digital asset class could be at risk of losing its appeal.
The provision requires digital asset brokers to report gains on cryptocurrency trades to the Internal Revenue Service for tax collection. Initial estimates claim that the provision would raise some $28 billion of tax revenue over the next decade.
For many years, the digital asset space has grown rapidly thanks to a lack of government regulation or oversight to get in its way. It was only a matter of time before the government stepped in to get their piece.
With the federal budget deficit expected to top $3 trillion this year, $28 billion of tax revenue over the next decade will not even come close to impacting the budget. But of course, it’s not about the money so much as the need for investor and consumer protections, according to the chairman of the SEC, Gary Gensler. How compassionate.
The digital asset space is full of “fraud, scams, and abuse” Gensler noted while also adding that “[the SEC] has taken and will continue to take our authorities as far as they go.”
While the lack of revenue from this proposal is puzzling, it is what might come next that has folks like Robert Barnes and crypto investors worried.
As Barnes explains in his interview on the Rebel Capitalist Show, government regulators could use this provision as a legal precedent for more meaningful regulation in the future. Currently, the federal government does not hold the power to tax property due to the Apportionment and Uniformity Clauses of the U.S. Constitution. That power resides with the states.
This provision would classify cryptocurrency as income and by implementing just a small tax, the regulators will be less likely to face harsh opposition that might potentially lose votes.
Once the SEC has established all cryptocurrencies as income, they will be able to implement a larger tax at a later date. Conveniently, the provision was purposely written broadly so that it would apply to the entire industry, including traders, miners, software developers, and long-term holders.
One analyst has projected the crypto market will grow at a 36% compound annual growth rate to a market cap of over $11 trillion by 2026. If the regulators get their way, this will bring in much more revenue than the $28 billion they are currently advertising.
What is not yet known is whether the US government will double down on its efforts to regulate and tax the digital asset space once a precedent has been set on the books. Any additional taxes or regulations down the road will be burdensome and likely halt the greater implementation of the relatively new asset class into the mainstream financial system. Even without much regulation, cryptocurrencies have struggled to find a use in the mainstream financial system other than a tool for speculators.
Recent concern over the environmental impact, high transaction costs, and the possibility of a central bank digital currency make up some of the other headwinds currently facing the cryptocurrency industry.
But at least for the moment, trading volumes and prices have begun to climb again, so it does not look like crypto investors are going to back down to these recent developments so easily.
Crypto has already shown its ability to garner loyal supporters, which leads one to believe this battle has only just begun.