The tax treatment of cryptocurrencies has been a matter of constant back and forth since their inception. On one end, regulators argue that digital currencies are no different than traditional equity stocks which put them in the same bag as government-approved securities.
Conversely, crypto evangelists and lobbyists opine that cryptocurrencies should not be clubbed together with traditional stocks under the umbrella of securities, and therefore, should be kept away from the regulations that typically govern securities.
Recently, in a bid to establish a crystal clear definition in legislative language to reduce legal uncertainty surrounding digital assets, Rep. Warren Davidson from Ohio reintroduced the draft bill called the Token Taxonomy Act in the U.S. Congress.
Token Taxonomy Act 2.0
The bill was first introduced by Congressman Davidson and Representatives Darren Soto, Josh Gottheimer, Tedd Budd, Tulsi Gabbard, and Scott Perry in December 2018 at the conclusion of the 115th Congress as a means to “achieve a […] win for America’s economy and for American leadership in this innovative space.”
Primarily, the bill seeks to clarify and streamline the conflicting crypto regulations of different states in the U.S.
Later, on February 14, 2019, Davidson tweeted that he along with Rep. Darren Soto is working on revising the bill according to inputs received by them. Davidson added that the updated bill would be reintroduced in Congress soon enough keeping in mind the urgent need for clear regulations pertaining to the treatment of cryptocurrencies.
Now, with the reintroduction of the bill in Congress, the level of hopium among crypto proponents and lobbyists has increased sharply.
The inconsistent treatment of securities among various states has, according to the authors of the bill, “clouded certainty for entrepreneurs and businesses that use blockchain technology.”
Why Is the Bill so Important?
Now that the bill has been reintroduced in the Congress, it’s imperative to learn what exactly it aims to achieve with regard to cryptocurrencies.
At its grass root level, the Token Taxonomy Act seeks to make some tweaks or in legislative jargon, amend the Securities Act of 1933 and the Securities Exchange Act of 1934.
The bill aims to exclude “digital tokens” from the definition of a security which typically has tax implications attached to it. The present legal definition of cryptocurrencies seems to be largely lost in translation. The Internal Revenue Service (IRS) treats tokens as property, the Commodity Futures Trading Commission (CFTC) treats them as commodities, while the Securities and Exchange Commission (SEC) approaches digital assets as securities.
Further, the bill also seeks to clarify the official jurisdiction of federal regulatory agencies such as the CFTC and the Federal Trade Commission (FTC) so that it does not clash with these bodies and their efforts to safeguard consumers from financial frauds.
However, the most important aspect of the bill is that it would supersede state laws that govern the treatment of digital tokens.
In a scenario where state regulations surrounding digital tokens overlap with the provisions specified in the act, the latter would supersede the former. This aspect of the bill is of utmost importance in that it brings a degree of uniformity to the treatment of digital tokens across all the states in the U.S. regardless of the treatment of the local state law.
This aspect of the bill essentially erases the state proposed definitions and regulations surrounding digital assets across the country. However, many argue that this might not sit too well with crypto lobbyists.
While the bill would bring a much-needed degree of crypto regulations in states where there is little to no regulatory infrastructure, it would, however, also wipe out state regulations that were developed to create a positive environment to promote the local crypto ecosystem. For instance, the state of Wyoming recentlya new bill titled “Digital Assets Existing Law” which categorizes cryptocurrencies into three broad categories – digital consumer assets, digital securities, and virtual currency.
Further, on January 14, 2019, Wyomingbill 62 that defines blockchain-based digital tokens as personal property.
With digital assets being defined as personal, intangible property, crypto tokens would no longer need exemptions from federal securities laws. In fact, Wyoming has, over time, steadily created a regulatory infrastructure on its own that oversees taxation, money transmission, and crypto securities transfer in a non-punitive manner.
However, should the Token Taxonomy Act come into effect, it would pull Wyoming back in line with states that are yet to take any regulatory measures related to cryptocurrencies, thus, practically nullifying the state’s efforts to date. The Act would ultimately create a level playing field for all states.
Experts Voice their Opinions
The authors of the bill seem to be pretty confident about its merits. Congressman Warren Davidson said in a recent press release,
“The Token Taxonomy Act is the key to unlocking blockchain technology in America.”
Congressman Davidson firmly believes that without the Token Taxonomy Act, the U.S. could run the risk of giving away its share of the digital economy to countries in Europe and Asia. According to Davidson, the absence of a uniform regulatory infrastructure would also stunt the entrepreneurial growth and innovation in the emerging crypto and blockchain space.
Similarly, according to Jerry Brito, Executive Director of Coin Center, a non-profit crypto research and advocacy group based in Washington D.C., the Token Taxonomy Act would officially put into law what the SEC has subtly hinted at to date. He opined:
“It’s great when Congress makes it a law, because then it’s absolutely clear it’s the law, with no ambiguity around it. I think that’s going to help people who are building these networks or have even already built them and are wondering about these regulations.”
While the proposed Act has gained significant support from influential people in the cryptospace, it has also managed to find several critics.
Caitlin Long, a Wall Street veteran who played an important role in passing several pieces of crypto legislation in Wyoming took to Twitter to express her concern regarding the “watered-down” definition of digital tokens. She, however, praised the other aspects of the bill, especially some of its proposed tax exemptions.
1/ UGH–HOPES DASHED! #tokentaxonomyact proposes 2 great things but the rest of it needs a lot of work. The $600 tax exemption & 1031 (like-for-like) exchange provisions are great. I wish the bill stopped there! The definition of "digital token" got so watered down that there's..
— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) April 10, 2019
With that said, the Token Taxonomy Act is far from being a comprehensive cryptocurrency-based bill.
It is indeed a giant step in the tumultuous journey of regulating the emerging asset class. As such, initiatives like these will not only separate froth from facts but also lead to the development of a cohesive ecosystem which would encourage crypto enterprises to expand their business footprint.
Concluding, the bill also sends a message to regulators that Congress is concerned about the future of blockchain technology and cryptocurrencies in the country.