Are Stricter Crypto Tax Reporting Requirements Bad News for Investors?

It’s been a bumpy ride for crypto investors lately. For example, Bitcoin ( BTC 0.85% ) has dipped nearly 25% over the past month alone and is currently trading at around $48,000.

While this recent bout of volatility can be attributed to a range of factors including the ongoing COVID-19 pandemic, a wave of new regulatory clamp-downs and tax changes in the crypto space are also key catalysts. In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Rachel Warren and Travis Hoium discuss.

Rachel Warren: Bitcoin temporarily dipped below $60,000 yesterday. A bunch of other cryptos sank as well. Ethereum was down as much as 10% during trading hours on Tuesday. Cryptos largely leveled back out today. Analysts are citing a few key catalysts for the mass sell-off that we saw in crypto yesterday.

One of these catalysts was the recent announcement that the Chinese government is going to be cracking down even harder on crypto mining. CNN reported that Chinese Authorities are ramping up a crackdown on crypto mining, calling it an extremely harmful practice that threatens to jeopardize the country’s efforts to reduce carbon emissions.

Another driver of yesterday’s crypto sell-off was the signing of the bipartisan U.S. Infrastructure Bill. In particular, investors seem to be concerned about a provision in the bill that would require crypto brokers, a term that can encompass exchanges, that under the definition could also potentially include other parties like miners, to directly inform the IRS of any and all transactions. Essentially, this could not only mean higher taxes for crypto investors, but more complicated reporting requirements in general.

According to CNBC, one of the provisions in the U.S. Infrastructure Bill expands the section of the U.S. tax code that requires people who receive more than $10,000 in cash and cash equivalents to file a report with the IRS. The report includes details about who paid them, names and social security numbers, and failure to report details about sending these payments is considered a felony offense.

Investors are worried about these increasing regulatory requirements. What could that mean? Here’s the question I have from this.

A few different questions actually. One, are you concerned about the future of cryptocurrency as regulatory and tax authorities or clamping down on an industry that has been so far widely unregulated? Do you think this could hinder the growth of the crypto market, or do you think that crypto perhaps should be much more widely regulated than it is now?

Travis, why don’t you take this one first.

Travis Hoium: I think as we’ve watched what’s happened in the crypto industry over the last few weeks. I think a lot of the moves are really positive. If you’re a bullish on the industry long-term, I know that there’s a lot maximalists in crypto who are excited about the industry because you are outside the system, if you will.

Rachel Warren:Right.

Travis Hoium: But realistically, if this is going to be a multi-trillion dollar industry as the market capital some of these cryptocurrencies indicates, we need to have rules around them. Both from tax structure standpoint, people need to make sure that they feel safe with their money or cryptocurrency being held by other people. We’ve seen plenty of stories about hundreds of millions of dollars being stolen by hackers.

Those are things that as the industry matures, things like tax and regulation just come along with. Its par for the course for the industry, and I think you’re seeing what happened with the Internet eventually in the late 90s and 2000s is, as the industry gets a little bit bigger and gets a little bit more mature, the government says, “Hey, we need to put some guardrails around this.”

Now, that can be good or bad depending on what specific maybe crypto you’re in or what your view on the industry is. But long-term, it shows that this is here to stay.

The other thing I think that this shows is, we’re not going to go the route of China, which is basically said, no crypto. [laughs] If you own cryptocurrency or you’re building something in cryptocurrency, you’re now seeing that the government is saying, “Okay, we’re not going to shut this down. We’re just going to put rules around it so that we tax and regulate in some way.”

Now it’s going to be weird because we are using rules that were sometimes written 100 years ago to try to [laughs] put regulations around cryptocurrency that’s still undefined on how it’s going to be used. But the exciting thing for me is really to see the use cases of crypto increase. We’re seeing more than just trading, and I think these regulations are going to just push us further and further in that direction.

Creators and companies are going to be more interested in figuring out how to find the utilities. I know this isn’t a word that the crypto industry likes, but as that happens, I think we’re going to see centralization [laughs]. I think I view this as very bullish long term for the crypto industry.