The United States Department of Treasury has published the “General Explanations of the Administration’s Fiscal Year” as President Joe Biden released his Budget for 2022. In its document, the Treasury claims that tax evasion using crypto assets is a “rapidly growing problem”. Therefore, they proposed to request more information from Brokers to “prevent” this alleged problem.
A Broker, according to the definition provided by the Treasury, is a dealer, barter, exchange, or person that “regularly” acts as an intermediary for a customer that transacts with crypto assets. The features of crypto assets and their digital nature allow customers to transact with offshore entities while remaining in the U.S., the Treasury claims.
Thus, these customers have opportunities to “conceal taxable income” with crypto exchanges or wallet providers. The institutions claim that crypto investors also create offshore entities to avoid tax reporting. Therefore, they deem it necessary to demand information from brokers to “bolster voluntary tax compliance”.
The Old And The New Demand For Crypto Asset Transactions
The current law gives the U.S. the privilege of receiving “certain information”, such as identity, proceeds from sales, and other information about a customer.
Crypto entities already must hold information about their clients, and many have a Know Your Customer (KYC) policy in conjunction with Anti Money Laundering measures. However, since 2020 the Treasury seeks to obtain more information from the crypto brokerage. A first proposal to monitor personal wallets or “covert” wallets was filed under Donald Trump’s administration.
It received strong pushback from the crypto community. Companies such as Coinbase, Square, Circle, and many more send their commentaries on a proposal that seemed rush and overly complicate the operations for crypto brokers.
The new law would demand brokers to report the activities on “certain beneficial owners of entities holding accounts with” them. In addition, the proposal highlighted the importance of international and states that U.S. brokers could provide information to offshore entities:
In order to ensure that the United States is able to benefit from a global automatic exchange of information framework with respect to offshore crypto assets and receive information about U.S. beneficial owners it is essential that United States reciprocally provide information on foreign beneficial owners of certain entities transacting in crypto assets with U.S. brokers.
The cooperation with offshore entities would be done on “an automatic basis”. The objective is to receive information on citizens who, directly or indirectly, “engage” in crypto assets transactions abroad. The ultimate goal is to create a “global automatic exchange of information framework”. The documents add:
The proposal, if adopted, and combined with existing law, would require a broker to report gross proceeds and such other information as the Secretary may require with respect to sales of crypto assets with respect to customers, andin the case of certain passive entities, their substantial foreign owners. The proposal would be effective for returns required to be filed after December 31, 2022.
At the time of writing, the total market cap of the crypto market stands at $1,43 trillion after weeks on a downtrend. The main cryptocurrencies are in the red with the potential for further depreciation if key support levels are lost.