Personal finance

Senate infrastructure bill cracks down on crypto tax reporting. How it may affect investors

Sen. Rob Portman, R-Ohio, left, and Sen. Kyrsten Sinema, D-Ariz., speak at a July 28, 2021 news conference in Washington, D.C.
Stefani Reynolds | Bloomberg | Getty Images

As U.S. Senators hammer out the $1 trillion bipartisan federal infrastructure bill, a provision in the measure seeks to raise funds with a crackdown on cryptocurrency tax reporting.

The rule may require cryptocurrency brokers to report traders’ information — including purchase and sales prices, transfers between brokers and transactions of more than $10,000 — to the IRS. 

The proposed enforcement may bring in an estimated $28 billion over the next decade, according to the Joint Committee on Taxation.

“This should have been required a long time ago,” said Eric Pierre, an Austin, Texas-based certified public accountant, owner at Pierre Accounting and co-host of the CPA Huddle podcast.

More from Personal Finance:
Cryptocurrency takes off in travel industry
13% of Americans traded crypto in the past year, survey finds
Here’s what cryptocurrencies will look like in 50 years say experts

Currently, investors must disclose virtual currency activity by checking a box on the first page of their tax return. However, financial experts say there’s confusion about what else investors need to divulge.

“I think a lot of people want to do the right thing,” said Pierre. “They don’t want the IRS on their back but they just don’t understand how it’s supposed to be reported.”

Although the IRS treats virtual currency like other assets, such as stocks or bonds, it can be difficult to calculate their profit or loss. That’s because cryptocurrency brokers aren’t required to provide Form 1099-B, which outlines an investor’s transactions. 

While some digital currency exchanges issue Form 1099-K, typically used for someone with more than 200 transactions worth in excess of $20,000 per year, it doesn’t show the purchase price, known as the so-called cost basis.

Without the asset’s starting value, investors can’t easily determine the profit for capital gains taxes.    

“There’s no real reporting or tracking mechanism, and it’s up to [tax professionals] to do a lot of subjective analysis,” said Pierre.

Moreover, many investors don’t realize day-to-day activity may be taxable. For example, let’s say someone owns $50,000 worth of appreciated bitcoin and visits an ATM to withdraw $200. Converting that $200 from bitcoin to cash may be a taxable transaction, Pierre said. 

The new proposal may require cryptocurrency brokers to report purchase and sales prices, making it easier for the IRS to track profits, resulting in higher tax bills for some investors. 

Tax planning

While the proposed rule won’t go into effect for 2021, cryptocurrency investors may limit future levies by trading in tax-deferred accounts, such as an individual retirement account, Pierre said. But it may be more difficult to tap the proceeds without a penalty.

If you have significant holdings, you should do some planning before year-end so you’re not hit with a surprise tax bill
Eric Pierre
Owner at Pierre Accounting

However, those with gains in an exchange may consider working with a tax professional to try to reduce levies.

“If you have significant holdings, you should do some planning before year-end, so you’re not hit with a surprise tax bill,” said Pierre.

Opposition from industry groups

The proposal has received pushback from industry groups, such as the Chamber of Digital Commerce, saying the current text is “too broad and vague,” with the potential to define other businesses in the digital currency sector as brokers. These groups worry the reporting rules may hurt companies without the ability to comply.

“Further clarifications are needed to ensure the digital asset ecosystem can continue to grow and flourish in the U.S.,” said Perianne Boring, president and founder of the Chamber of Digital Commerce. 

Products You May Like

Articles You May Like

Superyacht rentals, private jets and a soccer-themed hotel: Dubai is cashing in on the Qatar World Cup
Credit Suisse shareholders greenlight $4.2 billion capital raise
Don’t bank on free returns: 60% of retailers roll out stricter policies
Paramount scraps deal to sell Simon & Schuster to Penguin weeks after judge rejected merger
Beijing grinds to a near halt as China’s capital city battles Covid with more lockdowns

Leave a Reply

Your email address will not be published. Required fields are marked *