Democrats are continuously pushing for tighter regulations on cryptocurrency wash trading, despite Republicans successfully blocking a tax-loss harvesting clause aimed at the crypto industry in a recently-passed debt ceiling bill. Wash trading, the act of buying and selling the same asset repeatedly to create artificial trading activity, is illegal for securities. However, the IRS doesn’t currently treat cryptocurrencies as securities, which has led to a regulatory gap.
This loophole has caused controversies in the political sphere. President Biden claimed in a tweet that the US is missing out on $18 billion in tax revenue due to the abuse of this practice in the cryptocurrency industry. In response to this concern, Representatives Brad Sherman and Stephen Lynch have urged the U.S. Treasury and IRS to promptly impose regulations to address tax evasion.
However, resolving this issue might not be as straightforward as simply banning wash trading, according to Seth Wilks, Vice President of Government Relations and Success at TaxBit. He emphasized the importance of defining cryptocurrency brokers and imposing reporting requirements on their wash trading activities.
Implementing wash trading rules without holding brokers accountable would burden individual taxpayers with the responsibility of performing their own calculations. Crypto activity reporting is complicated and difficult to understand, leading Wilks to believe that most people aren’t intentionally evading taxes; it’s simply too complex.
In the traditional securities market, brokers keep track of their client’s trading activities and provide them with the necessary forms to file their returns. To effectively address tax revenue issues associated with crypto wash trading, cryptocurrency brokers must be held to a similar standard.
The debate over cryptocurrency regulations raises questions about the industry’s future and the balance between innovation and ensuring the proper safeguard for both individual investors and the wider financial system. While additional regulations may be necessary to protect against tax evasion and other fraudulent activities, it’s crucial to be mindful of the potential impact on innovation and legitimate market players.
Overall, the call for tighter regulations on crypto wash trading highlights the ongoing efforts by governments and regulators to tackle the challenges presented by cryptocurrencies and their rapid growth. As the industry continues to mature, the proper balance between fostering innovation and protecting investors, as well as the broader financial system, will remain an essential aspect of these ongoing conversations.
Source: Blockworks
