Crypto Infrastructure Bill: Will Your Tax Bill Increase?

America is looking to tax cryptocurrency more strictly than ever. 

The Build Back Better Act — also known as the 2021 infrastructure bill — contains a provision that seeks to raise $28 billion dollars through tighter enforcement of cryptocurrency tax law.

In this guide, we’ll break down how this bill impacts crypto investors like you (and why the world’s biggest cryptocurrency companies protested against the bill).

What’s changing with cryptocurrency tax law? 

Because of the infrastructure bill, centralized and decentralized cryptocurrency brokers like Coinbase will be required to report all crypto transactions to the IRS via Form 1099-DA starting in the 2025 tax year.

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. 

The infrastructure bill does not increase crypto tax rates. However, it’s possible that reporting requirements will cause issues for investors who’ve transferred crypto into or out of an exchange (more on this later). 

How does the crypto infrastructure bill change the way I report cryptocurrency taxes? 

The infrastructure bill does not change the way that investors report their taxes. The bill only changes how exchanges like Coinbase report taxable income. 

It’s important to remember that the IRS released its first guidance on cryptocurrency taxes as early as 2014. For years, the government has been clear that cryptocurrency is subject to income and capital gains tax. 

Once the infrastructure bill goes into effect, centralized exchanges will be required to send 1099 forms that detail gains and losses from cryptocurrency disposals to customers and the IRS. 

Of course, the IRS has been taking steps to fight crypto tax evasion for years. The government has issued John Doe Summons to exchanges like Coinbase and Kraken to hand over customer information. In addition, the IRS works with contractors like Chainalysis to identify tax fraud on public blockchains like Bitcoin and Ethereum. 

Why are crypto companies opposing this policy change? 

Some of the biggest companies in the cryptocurrency space — such as Coinbase and Kraken — came out in opposition to the infrastructure bill. 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 — which may force future cryptocurrency innovation overseas. According to guidance from the Treasury Department, ‘brokers’ include decentralized exchanges and certain wallet providers. 

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.

To comply with the infrastructure bill’s rules, decentralized exchanges may be required to collect user info — including name and Social Security Number. Many users may not trust up-and-coming decentralized exchanges with their personal information — which may hurt innovation in the space.

How are 1099 reporting requirements changing? 

1099 information reporting 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. 

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.

What’s the problem with the new 1099-DA requirements? 

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. Transfers into and out of centralized exchanges like Coinbase and decentralized platforms like software wallets happen regularly. 

This makes it difficult for cryptocurrency exchanges to provide information on cost basis within a 1099-DA—which is needed for proper reporting. Consider the following scenario:

In this scenario, Exchange B does have records for the original cost basis of David’s cryptocurrency. As a result, Exchange B will likely report his proceeds as $15,000, with no record of his capital gain.

If David hasn’t kept records of his cryptocurrency purchases, he’ll be required to recognize the entire $15,000 in proceeds as a capital gain. 

Quickly you can see the problem that even centralized entities face when it comes to reporting gains, losses, and income on a 1099-DA due to the transferable and open nature of cryptocurrencies. 

Yes, centralized entities like Coinbase and Gemini 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. 
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