IRS and US Legislators Define and Limit Crypto Tax Compliance | International wealth tax advisors

Part one in a series on US and international cryptocurrency taxation

Will the coming months finally bring guidance from the IRS and US lawmakers when it comes to cryptocurrency?

Crypto assets currently lack coordinated standards – but that may be about to change. Both the Internal Revenue Service (IRS) and Washington policymakers are busy changing guidance.

New tax guidance for digital assets

Are they currencies? Or are they investments? Since 2014 has IRS have treated digital assets as property for tax purposes. In other words, transactions in these virtual currencies (which include NFTs) must be reported on a tax return, just as holdings of stocks or other assets are treated. If cryptocurrencies are bought and then sold in less than 12 months, it is considered a short-term gain, while if held for longer than 12 months, they are taxed at the lower long-term capital gains rate.

The IRS updated the guidance in 2019, requesting responses if virtual currencies were received as income. Regardless of how much is received, the amount must be reported on the correct tax form and is subject to the same tax as ordinary or self-employment income. Crypto miners must include the fair market value of the asset and include it in their gross income.

This guide also addressed “hard forks” – when a single cryptocurrency splits into two separate currencies, as well as “air droplets” linked to these hard forks, which are considered ordinary, taxable income. The IRS determined that taxpayers could use LIFO, FIFO, or specific identification accounting methods to calculate crypto gains and losses.

Required reporting is increasing

While the 2020 tax year 1040 asked filers about cryptocurrency activity, the 2021 version saw the question moved front and center.o at the top of page one, to be precise. The question was also changed slightly to read: “Have you received, sold, sent, exchanged or otherwise disposed of any financial interest in a virtual currency at any time during 2021?”

Even more changes are in store for the 2022 return. In the draft Form 1040 for 2022, the IRS has created a bold category, “Digital Assets,” that asks if taxpayers sent or received crypto assets as income or gifts in addition to the categories from the 2021 form. Although taxpayers must check whether they are gifted or not, a gift is taxable only if it exceeds the annual threshold of US$16,000 or lifetime threshold, which is $12.06 million per year.

Keeping track of crypto assets is no easy task, and while securities firms provide profit and loss 1099s for mutual fund or stock sales, crypto exchanges like Coinbase have historically only provided the income received, leaving it up to the investor to figure out their cost basis.

However, that may be about to change. While the 2021 Infrastructure Investment & Jobs Act did not include tax increases, it did include a tax-related revenue source for the government—through broker reporting of digital assets. Crypto brokers will now be required to provide investors with tax documents similar to those provided for traditional assets in Form 1099-B. The agency is apparently working on a separate document, Form 1099-DA, which will include the number and type of assets, cost basis, fair market value and retention period. The provision applies to reports required to be submitted and declarations required to be submitted after 31 December 2023.

Regulatory Updates

While the IRS is making changes to how investors report crypto transactions, there are also other big changes in store. The possibility that crypto in general will be under the supervision of Commodity Futures Trading Commission (CFTC) – in line with crypto industry preferences – is growing. In early June, a landmark bill was introduced by the bipartisan team of Cynthia Lummis (Republican Senator from Wyoming) and Kirsten Gillibrand (Democratic Senator from New York). The Act on responsible financial innovation seeks to establish a regulatory framework for digital assets and proposes that the CFTC be the primary watchdog for cryptocurrencies.

And just last month, Digital Commodities Consumer Protection Act was proposed, identifying Bitcoin, Ethereum and other “fungible forms of digital property,” as digital goods covered by the CFTC. Securities and Exchange Commission (SEC) Chairman Gary Gensler is also backing this initiative, at least for non-security symbols.

While this will include Bitcoin, the world’s largest cryptocurrency by market capitalization, the SEC will still oversee most other tokens, which are considered “security” tokens in accordance with enforcement actions by the agency. The SEC will have jurisdiction over transactions involving digital goods that are used only for the purchase or sale of a good or service.

Stay informed

As U.S. policymakers attempt to regulate and standardize the “Wild West” of crypto, taxpayers should expect new rules and changed regulations, as well as increased scrutiny. Estimates suggest that the tax authorities are subassembly over $50 billion per year in unpaid crypto taxes. Therefore, it is important to stay abreast of these trends and changes and seek the advice of a trusted international tax advisor to prevent unnecessary surprises.