Crypto reporting requirements under the Infrastructure and Investment Jobs Act (PL 117-58), enacted November 2021, go into effect soon and will affect the industry in the United States.
The fact that the U.S. government is taking steps to increase regulation means that crypto is here to stay and that the government will not moving to ban it—an opinion that has nearly reached consensus among top institutions and firms. On the other hand, the Act, as well as further action by the government, will close several loopholes and increase the importance and strictness of reporting your crypto.
Tax revenue is expected to increase alongside the new reporting requirements. The deal, coming in at roughly $1.2 trillion, mandates tax reporting from digital currency brokers starting in January 2023. That measure alone is estimated to bring in $28 billion over a decade.
While buying cryptocurrency generally won’t result in a taxpayer being taxed, other types of crypto transactions will. A few examples include: converting it to cash, trading it for another crypto, or using it for purchases. The IRS does require investors to disclose their crypto asset activities yearly by checking a box on their tax returns; however, many investors fail to meet this obligation at tax time.
The new infrastructure bill mandates that crypto exchanges send Form 1099-B, which is commonly used for traditional brokerages, to report a yearly profit or loss of a given crypto asset. There has also been talk about introducing a new tax information reporting form, Form 1099-DA, Digital Assets. The rumored requirements may make it more complicated for investors to conceal their activity from the IRS and other entities—though calculating gains or losses for every transaction would still be quite the undertaking.
Exchanges currently struggle to report capital gains or losses because brokers can’t see the accurate cost basis for a given asset. When crypto moves between exchanges and wallets, without a neutral third party tracking transactions, accurate cost basis is lost, even when compiled on tax information forms like the 1099-B.
- Note: Even if investors don’t receive Form 1099-B, they are still responsible for reporting and paying their crypto tax liability.
Form 1099-B, Proceeds from Broker/Exchange, is generally a form filled out by brokerages to summarize customers’ annual gains and losses potentially subject to taxes. The form makes up the extensive industry of tax information reporting, or the transmission of tax information from private entities to both the IRS and taxpayers. This tax information reporting gives the IRS key information about cryptocurrency transactions inside the U.S, and allow them to properly assess the market—and by proxy its need for regulation.
Key takeaways of the infrastructure bill’s effect on crypto:
- The Act extends reporting requirements for transactions involving over $10,000 in cash to transactions involving a new category, that is, digital assets.
- The Act has the potential to impact what information businesses collect and report to the IRS in regards to crypto transactions. It does just enough to denote additional regulation for crypto, but stops short of providing that regulation in great detail. This ultimately means that while 1099 reporting is coming to the digital asset space, more concrete regulation might be forthcoming from the SEC and IRS.
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