By Arjun Kodial
The bipartisan infrastructure bill has been signed into law recently and features new rules regarding one of the hottest investments right now, cryptocurrency! In the eyes of cryptocurrency users and investors, these new regulations are not at all appealing. These new regulations pertain to, of course, taxes! The bill implements new rules when it comes to taxes and reporting gains to the IRS.
Brokerages that sell cryptocurrency to investors (ex. Coinbase, Binance, Crypto.com) will now be required to send an IRS Form 1099-B to their customers and to the IRS, as well as providing the name and address of the customer. Everyone knows that both taxes and death are inevitable, so what is the big deal? Well, the nature of cryptocurrency transactions is what makes everything a lot more complicated for investors. When trading conventional stocks, the brokerage you use (ex. Robinhood, TD Ameritrade, etc.) keeps track of the share price at which you bought in and when you sold. The brokerage knows if you took gains or losses while investing and therefore can accurately report these figures to the IRS. You will then be taxed according to your gains and losses.
What differs with crypto is the nature of the asset. Being able to send it between different “brokers” and wallets makes it very hard for brokers to track exactly what your gains and losses are. Now, let’s say you have $10,000 worth of Bitcoin in your personal crypto wallet, and you originally purchased it from Coinbase (your broker).
There are several different financial events that can take place with your cryptocurrency. Many of these are unrecorded due to the decentralized nature of crypto. You hold your Bitcoin, and after 6 months, its value goes to $15,000 and now you want to sell! You transfer this Bitcoin to Binance (another cryptocurrency brokerage) and sell all of it. Here’s where things start to get annoying. Binance must report this to the IRS as a $15,000 gain as they do not know the price that you had originally purchased the Bitcoin. This is because of the
decentralized nature of crypto. In reality, your gain is $5,000, but they don’t know this! The IRS says cryptocurrency investors must now keep their own records of purchases, sale, gains, and losses to accurately report to them. For crypto investors, they may easily rack up hundreds of transactions in a given year, often becoming a large hassle. But, if they decide not to keep a record of gains and losses, they will have an overstated 1099-B, leading to inaccurate taxes!
That’s not where it ends though! Section 6050I of the U.S. tax code is being expanded to now include digital assets. If you decide to use your cryptocurrency to directly pay for goods and services, businesses and people receiving crypto are now required to file a report with the IRS when receiving more than $10,000 worth of crypto. So, if you thought you would get out of income tax by buying a fancy new Lamborghini with your newly earned crypto profits, YOU’RE NOT!! This report to the IRS must include the details of the payer, including their name and social security number. Don’t file this report? You’ve just committed a felony offense! Luckily for you, these provisions will not take effect until January 2024!
Although this provision isn’t affecting your personal taxes much, your privacy is definitely in jeopardy. With privacy a core feature of cryptocurrency, this is leaving all of its users outraged. $10,000 is definitely a high threshold for most people, but what is stopping this threshold from falling to $1,000 or $600?
These provisions may not affect you now, but may come to haunt you 5-10 years down the road when cryptocurrency is potentially dominating the world!! This is only the beginning of provisions that will be added to cryptocurrency legislation, due to governments seeing themselves losing a grip over their beloved currencies.