The provisions of the bipartisan infrastructure bill, which was signed into law by President Joe Biden, have come into effect, marking a significant development in the regulation of digital asset transactions in the United States. One notable aspect of the legislation is the requirement for reporting many digital asset transactions exceeding $10,000 to the Internal Revenue Service IRS.
Enacted in 2021, the infrastructure bill broadened the obligations for brokers, compelling numerous crypto exchanges and custodians to report transactions exceeding $10,000 to the IRS. The legislation aimed to address concerns related to tax evasion and reduce the tax gap in the country. Despite its intentions, the reporting requirements have sparked debates among lawmakers who argue that collecting the specified information from brokers poses practical challenges and may, in some cases, be unattainable.
IRS tightens grip on crypto transactions
Under the new regulations, crypto brokers are obligated to furnish the IRS with detailed information on transactions, including the sender’s name, address, and social security number, within a 15-day timeframe. Originally slated to take effect in January 2023, companies are now required to submit these reports to the IRS starting in 2024.
Coin Center’s executive director, Jerry Brito, expressed concerns about the potential difficulty users may face in complying with the reporting requirements, particularly in the absence of clear guidance from the IRS. He highlighted the complexity of determining reporting obligations in scenarios such as miners or validators receiving block rewards exceeding $10,000. Questions also arise regarding on-chain decentralized exchanges of crypto for crypto, where individuals may receive $10,000 in cryptocurrency, posing uncertainties about reporting responsibilities and the criteria for assessing amounts.
Addressing these uncertainties, Coin Center proposed an alternative approach in August, suggesting the establishment of a de minimis exemption for crypto transactions. This exemption would serve as a solution to the perceived ambiguity in reporting guidelines and mitigate concerns about applying stringent requirements to second parties involved in crypto transactions.
While the IRS had already initiated requirements for U.S. taxpayers to report digital asset transactions back in 2019, the expansion of these obligations under the bipartisan infrastructure law introduces additional complexities. As 2024 approaches, the crypto community and industry stakeholders are closely monitoring developments and seeking further clarification from the IRS to navigate the evolving regulatory landscape effectively. The ongoing discussions underscore the challenges associated with striking a balance between regulatory oversight and the practical implementation of reporting requirements in the rapidly evolving -realm of digital assets.
How Will the New Cryptocurrency Tax Law Affect Investors?
The new cryptocurrency tax law can affect investors in several ways:
- Like-Kind Exchanges: Under the new tax law, cryptocurrencies cannot be considered for like-kind exchanges, meaning that swapping one cryptocurrency for another is a taxable event. Previously, some investors considered trading one cryptocurrency for another as a like-kind exchange, which could defer capital gains taxes. However, the new law specifies that like-kind exchanges only apply to real property, not cryptocurrencies
- Capital Gains Tax: Cryptocurrency is considered property for tax purposes, and thus subject to capital gains tax. When you sell or trade cryptocurrency, you have to pay tax on any capital gain you made as a result
- Crypto Income Tax: If you earn cryptocurrency through mining, staking, or other means, it’s considered income and subject to income tax
- Cryptocurrency Tax Breaks: There are some tax breaks for crypto investors. For example, gifts of cryptocurrency up to a certain amount can be given without incurring tax. Also, if you hold your crypto for more than a year, you could pay a lower long-term capital gains tax rate
- Reporting Cryptocurrency Transactions: All cryptocurrency disposals, capital gains, and losses must be reported on IRS Form Schedule D (1040) and Form 8949. Cryptocurrency income must be reported on IRS Form Schedule 1 (1040) or Form Schedule C (1040)
- Pass-Through Deduction: The new law introduces a deduction for pass-through entities, which could potentially benefit miners. This law allows a deduction of up to 20% of pass-through income, limited to 50% of wages paid by the entity or 25% of wages plus 2.5% of the unadjusted basis of the entity’s property