The Senate recently passed Democrats’ $3.5 trillion budget resolution package. While the policy is not yet law, it could have major changes in store for how the US taxes cryptocurrencies. Specifically, the policy would impose reporting requirements on cryptocurrency brokers, similar to how stockbrokers must report customers’ sales to the Internal Revenue Service (IRS). The plan still needs to be approved by the House, and it may change from its current form before then.
New reporting requirements possible
Cryptocurrency is a form of unregulated digital currency that is composed of lines of computer code. When it travels from one holder to the next, cryptocurrency is digitally signed. The market for cryptocurrencies is rapidly growing and has reached an estimated $1.8 trillion.
The new budget resolution policy would not create any new taxes on cryptocurrencies. Instead, cryptocurrencies would be subject to the same reporting requirements that apply to sales of stocks and other securities. When people sell stock for example, the original price that they paid for the stock as well as their gross proceeds on the sale are reported to the IRS by their brokerage. Digital asset brokers, which are essentially brokerages for cryptocurrencies, would be subject to these same requirements.
Some cryptocurrency brokers already report transactions to the IRS, although most do not. Because cryptocurrency is categorized as property, individuals must pay capital gains taxes on profits when they sell or cash in cryptocurrency. Capital gains taxes charge a tax on the profit earned on an investment between the time of purchase to the date of sale.
Third-party reporting can be effective at ensuring individuals pay taxes on their capital gains to the IRS. This policy could also have the added benefit of helping individuals pay the correct amount of taxes owed if they are having trouble tracking their cryptocurrency gains and losses.
Additional provisions of the law would require digital asset brokers to submit reports to the IRS when cryptocurrency assets are moved out of exchanges, and when transactions exceed $10,000.
Some argue that the bill does not intend to subject certain stakeholders to reporting requirements, such as cryptocurrency miners, transaction validators, stakers, software or hardware sellers, and node operators. Others state that the bill’s language could subject these organizations to reporting requirements.
The purpose of this legislation
Improving compliance with taxation on cryptocurrency can help pay for President Biden’s budget resolution package. Additionally, lost tax revenue in cryptocurrency assets could be substantial.
The bill still needs to pass by most lawmakers in the House before it becomes law. It may change from its current form by then. If the bill does pass, the Treasury Department will create regulations that codify how the cryptocurrency proposals would work in practice.
Pending cryptocurrency policy would require digital asset brokers to report cryptocurrency sales to the IRS. For help accurately reporting your cryptocurrency capital gains to the IRS, please contact your trusted Chugh CPAs, LLP professional.