As you enter into the cryptospace and really start learning how things work, inevitably you have to ask just exactly what type of asset is Bitcoin? When a brand new “thing” emerges, we as humans try to classify it based upon what we already know. Cryptocurrencies don't really fit right in any of the pre-existing models, but despite that we keep trying to fit an Ethereum shaped peg into a round hole, a square hole, a triangle hole, a…. well you get the point. Channeling the powers of my amazing mustache I have determined that Bitcoin is a completely new asset class that needs it's own forward-thinking set of regulations.
The Nature Of The Established
It is in our nature to want to define new things based upon what we already know, but cryptocurrencies warrant a little deeper and thoughtful investigation. Despite this, the SEC, CFTC, and the IRS all decided to measure cryptocurrencies by currently established standards and all three miss the mark, resulting in three different classifications for the beleaguered asset. Each organization wants to measure cryptocurrencies by their established rules and regulations and it just does not seem to fit right for any of them. Lets take a look at what each organization has said and how they now classify Bitcoin and cryptocurrencies.
The IRS Classifies Bitcoin As…
Property! According to the the last official statement on cryptocurrencies the stance from the IRS is that they are considered property. You can read their full statement here on their website, but below is the summary of how it applies to you as an individual;
The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
– Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
– Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
– The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
– A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
So as you can see, for tax purposes this is how the IRS is guiding you in reporting your cryptocurrency and supporting the fact that they consider it property.
The SEC Classifies Bitcoin As…
A Security! With multiple recent statements about cryptocurrencies, and ICO's in particular, the SEC has warned that many cryptocurrencies and most ICO's are securities. This came in a December 2017 statement and was reinforced with a recent release now targeting online exchanges as places where “securities” are traded. The SEC has 13 “tips” for cautioning those that would use online crypto exchanges, and while some are good advice in general it seems more like trying to stack the deck in their favor. Here is the list from their website;
In light of the foregoing, here are some questions investors should ask before they decide to trade digital assets on an online trading platform:
– Do you trade securities on this platform? If so, is the platform registered as a national securities exchange (see our link to the list below)?
– Does the platform operate as an ATS? If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC (see our link to the list below)?
– Is there information in FINRA's BrokerCheck ® about any individuals or firms operating the platform?
– How does the platform select digital assets for trading?
– Who can trade on the platform?
– What are the trading protocols?
– How are prices set on the platform?
– Are platform users treated equally?
– What are the platform's fees?
– How does the platform safeguard users' trading and personally identifying information?
– What are the platform's protections against cybersecurity threats, such as hacking or intrusions?
– What other services does the platform provide? Is the platform registered with the SEC for these services?
– Does the platform hold users' assets? If so, how are these assets safeguarded?
While the jig has been up for a little while on ICO's in my opinion, this new direction of the SEC going after exchanges seems sketchy. Classifying Bitcoin as a security puts it in the same class as stocks & bonds, and once again it feels like this square peg just won't go in the round hole.
The CFTC Classifies Bitcoin As…
A Commodity! The CFTC's has been claiming that Bitcoin & cryptocurrencies fall under their jurisdiction for a while now (you know like metals, grains, physical type goods usually) and a recent decision by a US federal judge has now backed that claim. They have a nice pamphlet on their site about what virtual currencies are and why the consider them a commodity.
This downloadable pamphlet is a quick guide to virtual currencies. It covers how virtual currencies can be purchased, why they are considered commodities, and what types of fraud can be found in the market. Use this guide to explore the world of virtual currencies and learn about potential risks.
Once again, it seem to me as if they are trying to stack the deck in their favor. The more court cases that stack up in favor of the CFTC the strong their case will become.
Regulation Battle Royale
In three separate, but completely obvious, attempts to claim Bitcoin & cryptocurrency regulation duties all to themselves, these organizations are all at odd's with each others decisions on the asset. How can Bitcoin be property, a security, and also a commodity? I am all for regulation, it is sorely needed in the cryptocurrency world, but I want to see it done right. With all of these organizations trying to claim regulation rights I have my doubts that it will be done right. The amount of additional power and money that will go to the organization that eventually does end up being the regulating body is surely enough incentive to put the full court press on if needed.
Cryptocurrency As Currency
The oddly looked over and overwhelmingly unsupported idea among government organizations is that Bitcoin is a new form of currency. A true replacement for fiat currency that is mathematically proven & deflationary by nature. A currency that is not controlled by fully centralized authorities that puts financial control back into the average persons hands. This is how I see cryptocurrencies, and the reason I got involved and decided to write helpful content for beginners. Blockchain gives us a better path forward, where all of life's unnecessary middlemen are cut from the equation. This simple fact is making some cower in their boots, while other are attempting to fight back to maintain their status quo.
Is it too late for the “middlemen” of human society? I think it is… I think they are just starting to realize it and it just might be too late to stop crypto from being what it was always meant to be.
The ‘Stache Says Cryptocurrency is Currency!
