Crypto Regulation in the U.S. – What’s New in 2022?

There are new U.S. cryptocurrency regulations, as well as older ones you should know about. We explain all of them in this guide.

By
&
Tom Blackstone
Gabe TurnerChief Editor
Last Updated on Apr 22, 2022
By Tom Blackstone & Gabe Turner on Apr 22, 2022
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If you’re thinking about investing in cryptocurrencies, you’ve probably heard there is a new crypto regulation in the U.S. And you may be wondering how this regulation will affect you as an investor or how it will affect the prices of cryptocurrencies. You might even be questioning if crypto is legal in your state.

We’ve got you covered in this in-depth guide.

We’ll go over the crypto provisions of the new Infrastructure Investment and Jobs Act, and we’ll discuss how these provisions may affect you. We’ll also discuss other crypto regulations in the U.S. that you should be aware of, as well as future regulations, and what you need to look out for.

So let’s dive right in.

The Basics

If you’re a crypto investor, it’s important to know what regulations exist right now or may be coming up in the future.

These regulations may affect your tax liability, what cryptocurrencies you can buy, what kind of hoops you may have to jump through to buy Bitcoin and other crypto, and more.

As we’ll explain in the next section, some regulations may even impact the prices of cryptos. So it’s a good idea to be aware of the legislation if you want to be an informed investor.

Pro Tip: Looking to buy and trade cryptocurrency above-board? Check out our guide to investing in crypto safely.

Will Regulation Affect Crypto Prices

It’s the million-dollar question: Will Bitcoin or Ethereum, or – insert your favorite coin here — suddenly tank in price when the next regulation is announced? Well, the truth is, nobody really knows. Here’s what we do know.

If regulations are extremely restrictive, they may negatively affect crypto prices. For example, if the U.S. were to impose a regulation that bans crypto exchanges, this would make it very difficult for U.S. residents to get crypto. And the loss of capital from this might cause a steep decline in the entire crypto market.

On the other hand, a regulation that requires exchanges to keep accurate records of trades and prevent market manipulation may open this market up to more conservative investors, and this may lead to higher prices.

So regulation can affect crypto prices for better or worse.

Luckily, the U.S. isn’t trying to ban crypto exchanges right now. In fact, it’s probably trying to allow banks to sell these digital currencies.

We’ll talk more about banks and exchanges later. For now, let’s discuss the new crypto regulations that everyone is talking about.

Infrastructure Investment and Jobs Act

Now, you might be tempted to glaze over this — but trust me, this matters when it comes to your taxes.

In November, 2021, cryptocurrencies were mentioned for the first time in U.S. legislation, when a small set of crypto provisions were added to the Infrastructure Investment and Jobs Act.

These provisions referred to cryptocurrencies as “digital assets,” and defined them as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”1

According to the new law, any company or person who “transfers digital assets on behalf of another person” will now be considered a “broker.” As a result, every centralized cryptocurrency exchange must now issue a Form 1099-B to each customer and to the IRS.

Pro Tip: If you’re investing in cryptocurrency, you’re going to want to brush up on some pretty specific cybersecurity measures. Check out our guide to protecting crypto for more information.

This means that centralized exchanges, like Coinbase, Binance, Kraken, etc., now have to track every purchase or sale of cryptocurrencies made on their platforms, indicate what each user paid for each coin, and how much profit or loss they made when they sold.

For a cryptocurrency investor, this is both good news and bad news. It is good news because you will now receive a 1099-B at the end of the year, which will clearly show your profit and loss from trades done on these exchanges. So if you had trouble keeping track of your profits and losses, this form will be handy.

The bad news is that this form will also be given to the IRS. So if you were hoping to hide your crypto profits from Uncle Sam, it’s going to be much more difficult to do that now.

Pro Tip: The 1099-B will not list trades done off-exchange. For example, it won’t list profit and loss from trades on DEXs like Uniswap, Pancakeswap, Trader Joes, etc. You’ll need a service like Cointracker to track these trades so that you don’t pay too much or too little tax.

These regulations won’t be implemented until the 2024 tax filing season. So you won’t receive a 1099-B for whatever trades you do in 2022.

But whatever trades you do in 2023 will be reported to the IRS the following year. So it’s important to keep this in mind when 2023 arrives.

Other U.S. Cryptocurrency Regulation

Although the Infrastructure and Investment Jobs Act is the first federal law to mention cryptocurrencies/digital assets by name, there have actually been related regulations in the U.S. for many years.

Several U.S. regulatory agencies have claimed that cryptocurrencies are similar to other assets and can be regulated without Congress needing to pass a law. Here are the most important examples of these kinds of regulations.

Identity verification

When cryptocurrency exchanges first began, users didn’t need to verify their identities on them. For example, if you signed up for a Mt. Gox account before 2013, you could buy Bitcoin without providing any ID whatsoever.

But in March of 2013, the U.S. Financial Crimes Enforcement Network (FinCEN) stated that cryptocurrency exchanges are “Money Services Businesses (MSBs)” that must keep documents proving the identity of their customers.2

Ever since then, U.S. cryptocurrency exchanges have been required to verify the identities of users before allowing them to trade this currency.

The important point for investors is this: If you sign up for a U.S.-based cryptocurrency exchange, you’ll be required to enter your name, address, phone number, upload a photo of the front and back of your ID, and provide a selfie to prove you are the person whose photo is in the ID. In the U.S., you generally won’t be able to trade on an exchange unless you do this.

In other countries, the identity verification requirements are less strict. Some countries only require you to pass identity verification if you do a certain volume of transactions. So exchanges that are regulated in these countries will allow you to trade small amounts without providing your identity.

But these foreign exchanges will get into trouble if they serve U.S. residents. So they will usually try to ban U.S. customers from using their services. If you have a U.S. IP address and try to use a foreign exchange, you will often find that you are banned from trading or even from opening an account.

This is because of FinCEN’s regulations.

If you run into this problem, you can try to get around it by using a VPN to hide your IP address.

FYI: A virtual private network (VPN) can keep your online activity hidden from prying eyes like ISPs, hackers, and governing bodies. You’re likely already using a VPN, but if not, check out our roundup of the best VPNs available today.

But keep in mind that this can be a risky strategy. Even foreign exchanges have algorithms that try to detect “suspicious transactions.” If your transaction gets flagged, the exchange may ask you to prove your identity. And in that case, you’ll have to come clean and admit that you are a U.S. resident who is violating the exchange’s terms of service by using it.

This may cause your withdrawals to be delayed. And if you can’t prove that you got your funds legally, you may even end up losing your deposit.

Because of this risk, U.S. residents should only use U.S.-based exchanges whenever possible. Some of the more secure U.S. crypto exchanges include:

  • Coinbase
  • Binance.us
  • Crypto.com
  • Kraken
  • Gate.io
  • Coinmama
  • eToro

Pro Tip: If you’re looking to select an exchange, first check out our Coinbase review and our analysis of Binance.us. Both appeal to different types of traders, the former being more for beginners and the later more for experienced crypto vets.

SEC Crypto Regulation: Securities

In the U.S., stocks and other securities are regulated by the Security and Exchange Commission (SEC). The SEC has argued that some cryptocurrencies are “securities” and therefore can be regulated by it.

However, not all cryptocurrencies are securities. For example, if a cryptocurrency is completely decentralized and is created through mining, it usually won’t be considered a security.

However, if a cryptocurrency appears to be an investment offered by a company in order to raise funds, and it appears that the company is building a product to give that crypto a value, the SEC may consider it to be a “security.”

And if a crypto is considered to be a security in the U.S., its developers must register with the SEC and file a bunch of paperwork that explains how the business intends to give the token value. This can be very costly for the developer.

Did You Know: Utility tokens represent a right to use a good or service. They do not get their value from the work of others. Utility tokens are generally not considered securities.

If a developer refuses to register, they must either claim a small business exemption or else move out of the country and refuse to sell their token to U.S. residents. If they do claim a small business exemption, they can only sell to wealthy “accredited investors” in the U.S.

Even if a security token is exempt from filing, it will still not be carried by U.S. exchanges, since most U.S. exchanges don’t want to go through the hassle of verifying that a particular investor is accredited.

Because of these restrictions, only certain kinds of cryptocurrencies are available on U.S. exchanges. If a token might be considered a security, its developers will usually move their headquarters off U.S. soil and implement measures to prevent Americans from buying it.

This means that you, as a U.S. investor, will be blocked from buying these cryptocurrencies.

The Howey Test

To determine whether a cryptocurrency is a security, the SEC uses a rule called the “Howey Test.” According to this test, a token is a security if it is:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To be derived from the efforts of others

Did You Know: If a developer is selling a token to investors based on their expectation that it will go up in value, and if this added value is expected to come from the effort of the developers, it is a security according to the Howey Test.

Crypto & Taxes

We’ve previously mentioned taxes when we discussed the Infrastructure Investment and Jobs Act, which requires exchanges to report the profits and losses of trades to the IRS. But even before this Act, the agency claimed that cryptocurrency transactions were taxable.

In a notice on crypto taxes, the IRS has stated that “virtual currency” is considered property. And just as with other property, receiving, buying, or selling it can create tax consequences.3

If you sell a good or service in exchange for cryptocurrency, the crypto has to be of the same value in U.S. dollars as the good you exchanged. If the good you sold is worth more than the crypto you got for it, the difference in value is considered a “gift” to the person you sold the good to. In this case, it can increase the person’s tax liability.

If the good you sold is worth less than the crypto you got in exchange, then the difference in value may increase your own tax liability.

Airdrop Alert: Free crypto? Yes please. Developers sometimes give out “airdrops” to loyal users of their apps to help create buzz around their tokens. The airdropped crypto is sent straight to your wallet. Just note that the IRS requires you to pay taxes on the airdrop according to the market price of the tokens at the time you received them (it’s treated as ordinary income).

If you buy crypto at one price and sell it at a higher price, it can be considered subject to the capital gains tax. If you buy crypto at one price and sell it at a lower price, the difference in price can be deducted as a capital loss.

Now let’s talk about some regulations that may be implemented in the future.

Future Regulations

There are a few regulations that have not been implemented yet but are being discussed by policymakers and may be implemented in the future. Here are a few of them.

Wash sales

Stocks, mutual funds, and other securities are subject to a “wash sale rule” under current tax law. This means that if you sell a stock at a loss and then immediately buy it back at a lower price, you can’t claim the loss for tax purposes.

However, crypto is considered property, not investment, under IRS regulations. This means that the wash rule doesn’t apply. So if your crypto falls in value and you sell it at a loss, you can claim the loss on your taxes even if you immediately bought it back at a lower price.

Many politicians are not happy about crypto investors using this loophole, so they want to pass legislation to close it.

The Build Back Better Act of 2021 contained language to make the wash sale rule apply to crypto. But it failed to pass the U.S. Senate. So for now, the loophole is still available.

Pro Tip: Are you using the wash sale loophole to save money on your taxes? Many politicians would prefer that you pay more instead. So keep in mind that they may take this loophole away at some point in the future.

Crypto banking and exchange regulations

In January 2022, several U.S. agencies engaged in a “crypto sprint” to determine if further regulations were needed for cryptocurrencies. After the sprint was over, they released a roadmap that detailed some areas of policy where they intend to do further research and  possibly release new regulations.4

Here is a list of topics they discussed:

  • Bank custody of crypto-assets
  • Sales of crypto-assets by banks
  • Stablecoin issuance
  • Crypto as collateral for bank loans
  • Rules for holding crypto on a balance sheet

From this description, it appears that the U.S. government may be planning to legalize the sale of cryptocurrencies by banks. It may also be trying to impose banking regulations on current such exchanges.

If this makes crypto more easily available, it could lead to a boom in their prices. But if it concentrates the crypto exchange business into the hands of the largest banks, it could lead to a stifling of innovation in the U.S. crypto market, and this could cause their prices to decline.

Either way, investors should keep an eye on these developments — because whatever happens is likely to have a big impact on crypto prices.

Wrapping Up

When you’re paying attention to the market and trying to make the best trades, it can be easy to forget about the effects of cryptocurrency regulation. But regulations can have a massive impact on both you as an investor and on the market as a whole.

Starting in 2023, the IRS will know of every trade you make on a centralized exchange. The wash rule loophole may be closed at some point. Banks may start selling crypto, but exchanges may have to comply with banking regulations. There are many pitfalls to avoid when you invest in crypto, and the regulatory landscape is certainly one of them.

Whatever happens, crypto regulations in the U.S. will continue to affect the market and all of us as investors. So it’s only wise and prudent to keep up with these developments as much as possible. With this in mind, consider bookmarking this page and checking back often, as we’ll continue updating this page in the coming months. If you’re ready to get started right now but still need some more information, check out our main guide to investing in crypto, or you can read about selecting a legitimate exchange.

Citations
  1. National Law Review. (2022). Cracking the Crypto Code: New Reporting Obligations (Current Developments in the World of Blockchain and Cryptocurrency). natlawreview.com/article/cracking-crypto-code-new-reporting-obligations-current-developments-world-blockchain

  2. Treasury Financial Crimes Enforcement Network. (2013). Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf

  3. IRS. (2022). IRS Virtual Currency Guidance. irs.gov/irb/2014-16_IRB#NOT-2014-21

  4. Federal Reserve. (2021). Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps . federalreserve.gov/newsevents/pressreleases/files/bcreg20211123a1.pdf