IRS and US Lawmakers Define and Refine Crypto Tax Compliance | International wealth tax advisors
Part 1 of a series on U.S. and International Cryptocurrency Taxation
Will the coming months finally bring cryptocurrency advice from the IRS and US lawmakers?
Crypto assets currently lack coordinated standards, but that may be about to change. The Internal Revenue Service (IRS) and Washington policymakers are busy changing the guidelines.
New digital asset tax guidelines
Are they currencies? Or are they investments? Since 2014, the IRS 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 like holdings of stocks or other assets are treated. If cryptocurrencies are bought and then sold in less than 12 months, then they are considered a short-term gain, while if held for more than 12 months, they are taxed at the lower capital gains rate at long term.
The IRS updated its guidelines in 2019, asking for a response if virtual currencies were collected as income. Regardless of the amount received, the amount must be reported on the appropriate tax form and is subject to the same taxes as ordinary or self-employment income. Crypto miners must include the fair market value of the asset and include it in their gross income.
These guidelines also covered “hard forks” – when a single cryptocurrency is split into two separate currencies, as well as “airdropsrelating to these hard ranges, which are considered ordinary taxable income. The IRS has established that taxpayers can use LIFO, FIFO, or specific identification accounting methodologies to calculate crypto gains and losses.
Required reports intensify
While the 1040 for the 2020 tax year asked filers about cryptocurrency activity, the 2021 version saw this question moved to the fore – to the top of the first page, to be exact. The question was also slightly edited to read: “At any time in 2021, did you receive, sell, send, exchange, or otherwise dispose of a financial interest in any virtual currency?”
Even more changes are in store for 2022 returns. In the draft Form 1040 for 2022the IRS has created a bold category, “Digital Assets,” which asks whether taxpayers have sent or received crypto assets as income or gifts in addition to the Form 2021 categories. While taxpayers should check whether they gifted or not, a gift is taxable only if it exceeds the annual threshold of US$16,000 or the lifetime threshold, which is $12.06 million this year.
Keeping track of crypto assets is no easy task, and while securities firms provide 1099 gains and losses for mutual fund or stock sales, crypto exchanges such as Coinbase have historically only provided income received, leaving it up to the investor to determine their cost basis.
However, that could be about to change. Although the Infrastructure Investment and Jobs Act 2021 did not include tax increases, it did include a tax-related revenue stream for the government, through the reporting of digital assets by brokers. Crypto brokers will now be required to provide investors with tax documentation similar to that 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 holding period. The provision applies to returns that must be filed and returns that must be provided after December 31, 2023.
While the IRS is making changes to how investors report crypto transactions, other significant changes are also on the way. The possibility that the crypto is generally under the supervision of the Commodity Futures Trading Commission (CFTC) – aligned 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 Responsible Financial Innovation Act tries to establish a regulatory framework for digital assets and proposes that the CFTC be the main supervisor of cryptocurrencies.
And just last month, The law on the protection of consumers of digital products has been proposed, identifying Bitcoin, Ethereum, and other “fungible forms of digital property,” as digital commodities under the guise of the CFTC. Securities and Exchange Commission (SEC) Chairman Gary Gensler also lends his support to this initiative, at least for non-security related tokens.
While this would include Bitcoin, the world’s largest cryptocurrency by market capitalization, the SEC would remain overseer of most other tokens, which are considered “security” tokens under the SEC’s enforcement measures. ‘agency. The SEC would have jurisdiction over transactions involving digital products that are used only for the purchase or sale of a good or service.
As U.S. policymakers attempt to regulate and normalize the “Wild West” of crypto, taxpayers should expect new rules and changed regulations, as well as increased oversight. Estimates suggest that the IRS is sub-collection over $50 billion a year in unpaid crypto taxes. Therefore, it is essential to keep abreast of these trends and changes and to seek the advice of a trusted international tax advisor to avoid any unnecessary surprises.