What is an “Infrastructure Bill” and how can it influence Cryptocurrency Taxes?
Big changes are coming to the cryptocurrency world, thanks to the infrastructure bill that is currently being negotiated by Congress. It appears to be strange and obscure that when we talk about the infrastructure, we mention crypto because there is absolutely no correlation between the two, yet our politicians have once again surprised us and added major changes to crypto reporting.
Not the entire Congress is supporting this proposal. Congressman Toomey stated, “Congress should not rush forward with this hastily-designed tax reporting regime for cryptocurrency, especially without a full understanding of the consequences.”
The entire issue of cryptocurrency has been a hot topic for the IRS. It is estimated that millions in taxes are not being collected due to tax cheats. In 2020 the IRS added a line about cryptocurrency on Form 1040, in an effort to gain more visibility into virtual currency transactions.
What changes to crypto can be expected as a result of the infrastructure bill?
The biggest and most important change: anybody who regularly facilitates crypto transfers between third parties will be treated as a broker, this does not include miners, software developers, stakers, and other individuals in the crypto economy who don’t have customers Furthermore, crypto will be considered a “covered security”.
What is covered security?
Most stocks traded in the U.S. are covered securities. Covered securities definition was developed to standardize regulations and filings across the United States, to avoid having each individual company having to register, file, and comply with regulations that are different from state to state. Brokers are required to report to the IRS the adjusted cost basis (simply put, it’s a purchase price, but sometimes other amounts, if the stock had split). Other information reported includes purchase date, sale date, and sale price. This all must be included on a specific tax form – 1099-B. This form is later utilized to prepare a tax return.
If crypto will be considered covered security, it would mean that the brokers will be required to report cost basis information on form 1099-B for all transactions.
Why is form 1099-B such a big deal?
When dealing with virtual currency, it is almost impossible to identify a cost basis with DeFi and customers with self-custody assets. In addition, concerns have been expressed that such strict regulations would detract people from wanting to invest or participate in crypto networks in the United States. However, from the perspective of a tax accountant, I can honestly say that it would make my job easier. Currently, because of a lack of standardized reporting, my clients are struggling to properly report transactions on their tax returns. We have to request that our clients download all transactions from exchanges, then export them to third-party software that is able to sort and categorize all sales and exchanges into a format required for a tax return. This entire process becomes even more cumbersome if the client utilized multiple exchanges and has moved crypto from one exchange to another.
The new bill will require exchanges to “talk” to each other.
This is also great news for all tax accountants and will simplify reporting in the future. Let’s assume that you transfer dogecoin from Binance to Coinbase. Binance will be required to send cost basis to Coinbase, which in turn will allow Coinbase to issue accurate information on form 1099-B.
If a business receives crypto in excess of $10K, the business will be required to collect information about the payor (name, address, and SSN) and file a tax form disclosing this transaction. Currently, equivalent reporting is required under the Anti Money Laundering Act for all cash transactions.
It is estimated that a bipartisan infrastructure bill will raise $28 billion from crypto investors by applying new information reporting requirements to exchanges and other parties. Important to note, The cryptocurrency measures were last-minute additions and were done rather hastily and still might undergo significant changes. It is also important to note that the actual cost of the bill is projected to be $550 billion and it is unclear where the politicians will get the rest of the money. Previously, the government has discussed increasing corporate taxes for C Corps, which currently pay a flat tax of 21%. However, that increase to 28% has failed to get a proper amount of support and is no longer being discussed by the politicians.
If adopted, these new rules will be effective for starting with the 2024 tax year.