What does Biden administration’s latest move on cryptocurrency mean for investors?

There have long been concerns surrounding the underground economy supported by cryptocurrencies. Few years back, the global drug trafficking was also alleged to be supported by digital currencies. With more and more formalisation of cryptocurrencies, the drug trade aspect of it, has more or less diminished.

However, the concerns surrounding the tax evasion and black money continue to persist. This is one of the probable reasons why policymakers, who otherwise bank a lot on the greater fool theory, have been averse to an asset class that follows the greater fool principle to a large extent. For the uninitiated, the greater fool theory suggests that if there is another person ready to buy an overvalued asset at a higher cost than you, it is a good investment for you. However, in the long run, this attitude leads to scary wealth bubbles.

But, as the market for cryptocurrencies grows, governments, rather than being indifferent, as trying to address the taxation issue in a more formalised manner. Among the major economies, the first step seems to have come from the US.

The US government, earlier this month, announced a gamut of proposed changes to cryptocurrency reporting as part of Joe Biden’s proposed American Families Plan.

                     

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As per the plan, a new legislation will come up for businesses and crypto exchanges, which would require them to report any digital currency transactions with a fair market value of US$10,000 or more, to the US Internal Revenue Service (IRS).

The move will bring cryptocurrencies at par with cash as the threshold for reporting the cash deposit transactions currently is at the same level. As on date, in case you deposit anything in excess of US$10,000 into your checking account, your bank is supposed to make its entry with the federal government.

According to a statement by the Treasury Department, cryptocurrency “poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”

With regulatory vigil, the move may lead to reduction in illicit payments, reduced tax evasion and decreased risk of cyberattacks. That said, no one would say that this would be the last move on this front. It is probably the beginning. The beginning of mainstreaming the cryptocurrency at a policy level.


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