Bitcoin and Other Cryptos Are Near Records, but Tougher Tax Rules Are Coming

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Cryptocurrency investors and recipients may soon have to report more transactions to the Internal Revenue Service.

The infrastructure package that Congress passed last week includes a variety of new tax-reporting requirements that could affect how people use crypto. If someone buys a

Tesla

in

Bitcoin,
for example, the IRS will want to know.

The bill, which President Joe Biden is expected to sign soon, expands the definition of “broker” to include any person responsible for “effectuating transfers of digital assets on behalf of another person.” Brokerages like

Coinbase

Global (ticker: COIN) already meet legal requirements for information gathering and reporting transactions to the IRS.

But the paper trail for the IRS can go dark if someone transfers their crypto from one brokerage to another, or uses a digital wallet, “DeFi” lending platform or exchange. Those entities generally don’t collect tax information or verify users’ identities, leaving it to taxpayers to self-report capital gains or losses.

The new rules will require broker-to-broker sharing of information so that all brokers include a taxpayer’s cost basis and capital gains on forms submitted to the IRS.

The rules could also extend information-gathering requirements to wallets and DeFi exchanges. They may then be required to share the data with brokerages that issue 1099-B forms to individuals and report their information to the IRS. The IRS could then tax any increase in the value of the cryptocurrency—the difference between the cost basis and net proceeds from a sale—as a capital gain.

The crypto industry lobbied hard in August to prevent the Treasury Department from expanding the definition of broker so broadly, arguing that it could sweep up “miners” that process transactions, or developers of crypto software or hardware.

But miners won’t be included in the rules, a senior administration official told Barron’s. “Miners will not be part of this reporting regime,” she said.

Rather, the goal is to prevent people from obfuscating transactions by sending them through a digital wallet or DeFi exchange. As it stands, when someone buys a crypto through one brokerage and then transfers it to another, their cost basis doesn’t follow the transaction. Most wallets and DeFi exchanges also don’t collect any tax-reporting customer information.

But the White House is signaling that wallet providers and DeFi platforms will be required to maintain users’ transaction data.

“The changes extend reporting requirements to sending brokers even if the recipients aren’t brokers,” the administration official said. “Not all DeFi exchanges are created equal. Some have middlemen and know this information–untangling those entities is what this regulation would do.”

Another provision in the bill requires any person that engages in a trade or business to report crypto transactions worth more than $10,000. If you buy a car with Bitcoin or

Ethereum,
the auto maker may have to fill out an IRS Form 8300, now used for reporting cash transactions over that amount.

Lawyers for the crypto industry argue that individuals and businesses could wind up being deputized as tax-information collectors—and may have no way of complying.

“This strikes at the heart of the peer-to-peer nature of this technology,” said Abraham Sutherland, an attorney and advisor to the Proof of Stake Alliance, a crypto lobbying group. “The underlying statute assumes you’re looking at someone and can inspect their identity. But DeFi doesn’t work with counterparties–you don’t always know who they are.”

Sutherland argues that many entities or people receiving more than $10,000 in crypto could face new reporting requirements. If someone pays their rent in Bitcoin, for instance, the landlord may have to report the transaction if it’s more than $10,000. If someone subscribes to a service and pays in crypto, it could also trigger reporting if the total transactions add up to $10,000 within a 15-day period.

Moreover, artists and others selling NFTs could face new reporting requirements since they may be involved in a trade or business. That could prove tough to comply with, since NFTs are often auctioned to anonymous buyers who may be anywhere in the world.

“If I’m an artist selling an NFT, I don’t know who’s on the other side of an auction or sale,” said Sutherland.

The rules won’t take effect immediately. The Treasury Department will have to issue them through a rule-making process that includes a period of public commentary. It may not be until Jan. 1, 2023, that brokers and others face new requirements.

Lobbyists are now working on more revisions, aiming to get amendments passed in Congress. At least some in Congress are likely open to changes, including members of the Congressional Blockchain Caucus, a bipartisan group of lawmakers in the House who “believe in the future of blockchain technology” and want a light regulatory approach.

For now, the crypto markets don’t appear concerned. Bitcoin and Ethereum, the two largest cryptos, both flirted with records on Monday with Bitcoin trading above $67,500 and Ethereum around $4,800.

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