Latest Developments On Bitcoin Taxation

Cryptocurrency has exploded on the market and forms a sizable part of investments today. While most people are familiar with the earliest cryptocurrency (Bitcoin), the number of cryptocurrencies has grown significantly. In fact, as of 2021, there are over 6,000 cryptocurrencies which is a huge expansion from the few that existed in 2013. Wanting to ensure that cryptocurrency is treated like any other type of income, the IRS has developed guidelines for taxing this asset. The IRS even includes a question on the form 1040 asking about the sale, trade, and exchange of cryptocurrency. Since these laws are always changing, what are the latest developments? For any investor, these are a few things you may want to know.

New Infrastructure Laws

In 2023, cryptocurrency brokers will have to record transactions and track them for both their customers and the IRS. This is similar to how stock and bond brokers currently do with the tax form 1099-B. The information of their customers, gross proceeds and any capital gains or losses will be disclosed. Any business that receives a payment of $10,000 or more in crypto will have to report the sender’s identity to the government as well. This will not change the process for most taxpayers as bitcoin taxation is already present with the Form 1040. However, this safeguard has been put in place to make cash laundering impossible.

Threats to Decentralized Exchanges

Decentralized exchanges may no longer be possible with new tax laws in place by the IRS. Crypto brokers serve as a middleman between buyers and sellers but decentralized exchanges are not designed to track and report network transactions. Instead, they rely on complex mathematics in order to perform the same functions of a traditional exchange. The appeal to many investors of cryptocurrencies is that there is no group of executives who have access to the information that the IRS is now requiring. Unless the decentralized exchanges change their model to become centralized, they may not be able to operate under the new tax laws.

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Enforced Reporting of Earnings

The current cryptocurrency tax law requires earnings to be taxed just like any other type of investment. However, the enforcement of this provision has been poor in the past and mostly has relied on self-reported data. Trying to plug the crypto tax gap, the IRS will not require brokers to report their data, making it easier to catch individuals who don’t report their earnings. Since many investors purchased cryptocurrency years ago, their gains have been significant and any taxes that they owe on sales may also be large.

These are the newest tax laws regarding cryptocurrency and what the laws mean for investors today. With greater enforcement and regulation, investors may not have the anonymity of their investments as they did in previous years. Having greater oversight over the investment process may be troubling to investors but is expected to continue.