Congress recently passed a more than $1 trillion bipartisan infrastructure bill last week that could affect how people use cryptocurrency.
And if President Joe Biden enacts the house bill — and odds are, he will — crypto investors (and recipients alike) will be required to report more transactions to the IRS.
This rule is among the several new tax-reporting requirements packaged in the bill.
So, if you buy a Tesla today with Dogecoin or Bitcoin, the IRS will need all the details. The IRS simply wants information on everything you buy with crypto.
What if the IRS paper trail goes dark?
The House bill gives the name “broker” a whole new meaning — and now a broker is also a person or entity effectuating crypto transactions on your behalf (like in the case of cryptocurrency brokerages such as Coinbase).
Speaking of which, Coinbase Global is fully compliant with legal requirements obligating brokerages to gather crucial information and report crypto transactions to the IRS.
But what if you transfer crypto from one brokerage to another — using a “DeFi” lending platform (or exchange) or digital wallet — how will IRS monitor the paper trail?
Digital wallets, DeFi lending platforms, or crypto exchanges hardly verify a users’ identity or collect their tax information. Taxpayers are often left to self-report their capital gains or losses, which may or not happen.
The new rules require broker-to-broker info sharing
For the new rules to remain relevant, crypto brokerages need to enter taxpayers’ cost basis and capital gains information collectively — and share that info with the IRS.
DeFi exchanges and digital wallets could also share users’ tax information with the IRS.
These entities may also be required to share more tax data with brokerages — specifically those that issue 1099-B forms to people and report their tax to the IRS. That way, the IRS can then tax any increase in the value of a digital asset as a capital gain.
In August, the crypto industry fought hard to block the US Treasury from broadly expanding the meaning of the word “broker”, arguing it could kick out crypto software developers and crypto miners’ that help process crypto transactions from their jobs.
But the crypto industry can breathe a sigh of relief, at least, as crypto miners aren’t included in the new tax rules. They’ll simply not be part of the tax-reporting regime.
Another provision in the bill requires people engaging in business to report all crypto transactions above $10,000. So, if you buy a car today with Ethereum, for instance, the seller needs to fill out Form 8300 (reporting the transaction) and send it to the IRS.
