America is looking to
more strictly than ever. tax cryptocurrency
The 2021 infrastructure bill contains provisions that seek to raise $28 billion dollars through tighter enforcement of cryptocurrency tax law. This bill was signed into law by President Biden on November 15, 2021.
In this guide, we’ll break down how this bill impacts the average cryptocurrency user (and why the country’s biggest crypto companies stand against the bill).
What’s changing with cryptocurrency tax law?
are not going up. However, the federal government is trying to take steps to fight possible tax evasion. Cryptocurrency brokers will be required to report all crypto transactions to the IRS via crypto tax rates . Form 1099-B
In addition, virtual currencies will be included in Section 6050I.
As a result, people conducting a trade or business and are recipients of crypto transactions greater than $10,000 will be required to report the sender’s personal information, including name, address, and Social Security number.
Why are crypto companies opposing this policy change?
Some of the biggest companies in the cryptocurrency space such as Coinbase, Square, FTX, and Kraken have come out in opposition to this new tax law. While most crypto companies are in favor of some form of regulation, the general consensus is that the bill presents more problems than solutions.
One concern is that the bill’s definition of “broker” is far too broad and could potentially encompass anyone who facilitates a digital asset transfer, including cryptocurrency miners and open source developers.
This is problematic as these market participants (as well as others within the DeFi space) do not have the ability to report customer information via 1099’s to the government, yet this law could potentially require them to. This could force businesses and future cryptocurrency innovation overseas.
How are 1099-B reporting requirements changing? has existed within the traditional finance space for a long time, and all 1099 reporting serves the same purpose: to report non-employment related income—i.e. income earned outside of a W2 such as capital gains from equities or stock trading. 1099 information reporting
Given that cryptocurrencies and stocks are treated very similarly from a tax perspective, it makes sense why governments want to implement similar 1099 information reporting within the cryptocurrency ecosystem.
However, it’s important to note that cryptocurrency has key technological differences from traditional finance that could present problems within the 1099 reporting regime.
Cryptocurrency is designed to be transferable, peer-to-peer, and operate without the need for a third-party. This is fundamental to the technology, and transfers into and out of centralized exchanges like Coinbase and decentralized platforms like software wallets happen regularly.
These transfers makes it difficult for cryptocurrency exchanges to provide cost basis information within a 1099-B—which is needed for proper reporting. Consider the following scenario pictured below:
When that amount of BTC shows up in David’s BlockFi wallet, BlockFi has no way of knowing what US Dollar value David actually acquired the BTC at (i.e. his cost basis). BlockFi simply sees that an amount of BTC showed up in his wallet. If David later sells that BTC on BlockFi, how would BlockFi report the gain upon sale? Did David originally buy this BTC for $5,000? $10,000? What is his cost basis? Was his gain $40,000 or $5,000? BlockFi doesn’t know.
Quickly you can see the problem that even centralized entities face when it comes to reporting gains, losses, and income on a 1099-B due to the transferable and open nature of cryptocurrencies.
Sure, centralized entities like Coinbase and BlockFi could share cost basis information with one another, but what if the transfer actually came from a cold wallet? Or a mining pool? Or anywhere else that isn't 3rd-party owned?
Since centralized entities only account for a small portion of crypto transactions, it’s clear that this regulation could do
serious damage to the ecosystem. Will the infrastructure bill raise my crypto taxes?
While it’s reasonable to be concerned about the bill’s broad definition of broker, potential privacy issues, and its impact on the cryptocurrency ecosystem, the bill
won’t “raise” taxes for cryptocurrency investors. It will simply create mechanisms for the government to better enforce tax compliance as the IRS will have more information on who is earning crypto-related income. What about Section 6050I?
The infrastructure also expands Section 6050I so that any person or entity who receives more than $10,000 in virtual assets must file a report with the IRS with the sender’s personal information.
Section 6050I was initially created to discourage large, in-person cash transactions. If applied to digital assets, it’s likely that this regulation will heavily discourage swaps, as it requires participants to give away sensitive information to exchanges or recipients.
Consider the following scenario.
In this case, Ryan would need to take Faith’s name, address, and Social Security number. It’s likely that Ryan would not feel comfortable taking this information, nor would Faith want to give it away freely.
However, once the new infrastructure bill goes into effect, it’s possible that Ryan would be
guilty of a felony if he doesn’t collect and report Faith’s information. When will this bill take effect?
Originally, the crypto provisions of the infrastructure bill were set to go into effect in the 2023 tax year. However, implementation of these requirements has been delayed indefinitely.
In December 2022, the Treasury Department and IRS
that crypto brokers were not required to follow the crypto provisions of the infrastructure bill until ‘final regulations are issued’. announced
At this time, the Treasury Department has yet to provide guidance on important issues — such as whether decentralized protocols like Uniswap will be considered ‘brokers’.
It’s important to note that even though implementation of crypto regulations has been delayed, investors are still required to report cryptocurrency capital gains, losses, and income to the IRS.
Will crypto taxes increase in the future?
Ultimately, this infrastructure bill highlights the government’s focus on cracking down upon cryptocurrency tax enforcement. We only expect these crackdowns to increase in the coming years.
We know that navigating the tax code can feel stressful.
can help. The cryptocurrency tax software platform integrates with exchanges like Coinbase, Kraken, and Binance, to allow investors to report their taxes in a matter of minutes. CoinLedger Get started with a free preview report today. No credit card is required to sign up and test out the platform!