US Congressmen blame crypto firms for ‘tax gap’ in letter to Treasury

US senator attacks Bitcoin on Twitter blames it for raising energy prices

The crypto-assets have emerged as an important issue for policymakers since their creation in
2009 and their subsequent growth and increasingly widespread use. Applications based on distributed ledger technologies like blockchain, pose challenges for policymakers in a wide range of areas, including in tax policy.

The use, trade, and level of market capitalisation of these assets have been increasing and their technological features are rapidly evolving, posing challenges for tax administrations and policymakers. The problem was recently highlighted by members of the United States Congress, Brad Sherman and Stephen Lynch, who have penned a letter to the heads of the Treasury and the Internal Revenue Service (IRS), demanding the implementation of tax regulations for the crypto industry.

In a letter addressed, U.S. Representatives Brad Sherman and Stephen Lynch raised concerns about the compliance practices in cryptocurrencies. They underline the issues of tax evasion with the currencies leading to a tax gap. They further present an audit report from September 2020, where the Treasury Inspector General for Tax Administration (TIGTA) mentioned the IRS’ inability to identify pro-crypto taxpayers owing to the lack of reporting.

Also, the Infrastructure Investment and Jobs Act (Bipartisan Infrastructure Bill) signed into law by President Joe Biden in November 2021, required taxpayers to report crypto transactions starting in 2023. The representatives, Sherman and Lynch called for the prompt release of the proposed regulations to “close the tax gap and bring the cryptocurrency industry into full tax compliance.”

In May, the Biden administration renewed its push for a 30% Digital Asset Mining Energy (DAME) tax on cryptocurrency miners, which was first announced as part of Biden’s FY2024 budget in March 2023. However, the proposed crypto mining tax did not make it into the May legislation that addressed raising the U.S. debt ceiling.

It is important to note that various challenges are highlighted by academicians and scholars regarding the taxation of cryptocurrencies. These include Valuation and basis, issues related to terminology and classification, lack of single regulatory practice, legal backing, intrinsic value and taxation of hard forks.

Here, policymakers should guide on how virtual currencies fit within the existing tax framework, address the major taxable events and income forms associated with virtual currencies and further establish a comprehensive mechanism for taxation. These above measures can play a crucial role in establishing a well-crafted crypto ecosystem.

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