IRS would have easier time tracking crypto investments under pending legislation
By Patrick T.R. Charvat
Included in the massive federal infrastructure bill now making its way through Congress is a provision that would make it easier for the IRS to learn about cryptocurrency-related capital gains – and taxpayers who fail to report that income.
Part of the Infrastructure Investment and Jobs Act is legislation requiring cryptocurrency exchanges to report capital gain and loss data in a 1099 form, much like brokers now do with stocks and bonds. Exchanges would then issue the new form to both investors and the IRS.
The proposed legislation – which has additional measures to help the IRS collect reportable income – comes as the agency steps up efforts to enforce compliance on the opaque cryptocurrency world.
While the legislation is still pending, it is also a signal to investors the IRS’ determination to force tax compliance is not wavering, and crypto investors need to ensure they accurately report transactions.
Additional measures under the proposed legislation
Currently, exchanges such as Coinbase or Binance are required to issue cryptocurrency investors a Form 1099-K if the gross amount of total reportable payment transactions exceeds either $20,000 or 200 transactions in a single calendar year.
While the form does not explicitly show what is and is not reportable on a tax return, it is one tool that the IRS has to start an inquiry.
Under the proposed legislation, the reportable payment threshold would drop from $20,000 to $10,000.
Additionally – and most significantly -- the legislation would expand the definition of a broker to include cryptocurrency exchanges.
Currently, exchanges are not considered brokers due to their dealing in digital assets that developed with little Congressional oversight. This has allowed exchanges to enjoy more relaxed reporting requirements.
By placing exchanges on the same footing as traditional brokerages, they would have to report expanded capital gain and loss data in the same way brokers now report stock and bond transactions.
As mentioned earlier, the legislation calls for requiring exchanges to issue a 1099-like form. Whether the IRS will develop a new document or use the existing 1099 is uncertain.
Crypto investment and taxes now
Crypto investors need to remember that the IRS treats the reporting of virtual currencies similarly to stock. That means you are required to account for every transaction and pay capital gains tax on any profits from the investment.
Remember: You must save every transaction email or document and losses are as crucial as gains. For example, if you take a $30,000 loss in a Bitcoin sale but cannot prove it is a loss, the IRS will consider the proceeds from the sale a taxable gain.
Also, because many cryptocurrency exchanges are offshore, you need to file a Foreign Bank Account Report (FBAR) if your virtual currency account exceeds $10,000 at any point in the tax year.
To date, the IRS has used subpoenas to get information from exchanges and pursue taxpayers. If passed, the new legislation would allow the agency to avoid such a time-consuming and costly measure as they continue to crack down on cryptocurrency investors.
Should the infrastructure bill pass – along with the crypto provisions – it would not take effect until 2023. Also, the legislation still has to go through the House, which could make changes when it returns from recess in mid-September.
Boyer & Ritter will continue monitoring the legislation and issuing updates. Meanwhile, if you have concerns about navigating the cryptocurrency taxation landscape or responding to the IRS, our team of tax experts is ready to help.