This seemingly random question became a major stumbling block for the ambitious undertaking of the Biden administration’s infrastructure bill.
The bill addressed U.S. taxation of crypto earnings. The Biden administration had agreed on a proposal that would give federal regulators authority to impose new tax reporting obligations on cryptocurrency brokers. The key issue is that of who is considered a broker of securities. Will, the new rules be set to strengthen the U.S Treasury Department’s authority to collect legitimate tax information, or will unintended consequences caused by a vague definition of the term “broker” force crypto companies out of business as they are struggling to comply with the new rules?
A debate that lets emotions run wild.
According to an anonymous Treasury official cited on Bloomberg, developers, miners, hardware, or software providers should not be affected by the new regulations as long as they don’t also act as brokers.
The main criticism on the part of the crypto industry is the vague wording of the Treasury Department directive and a sense that Congress does not understand the industry well enough to regulate it.
Based on the vague definition of a broker as anyone „regularly providing any services effectuating transfers of digital assets”, miners, developers, DeFi protocols, and other participants in the eco-system could be required to comply with Internal Revenue Service (IRS) rules to provide data that they do not even possess. Non-compliance with the regulations that are impossible for them to fulfill could force these players out of the U.S. market.
That’s pretty serious but whether the Treasury directive’s bite is as bad as its bark sounds right now will depend on how aggressively the IRS enforces the new regulations. According to the official, the intention is to strengthen the Treasury Department’s authority to collect legitimate tax information but not to go after businesses that do not have transaction data. It is common practice that the IRS takes note of what the Senators’ intentions were when passing a bill and should they be passed, new regulations won’t go into effect until 2023. Plenty of time for the industry to bring the benefits of crypto to the forefront of lobbying campaigns.
Let’s take a further step back and zoom out on the implications of the debate. Isn’t it rather remarkable, that the regulation of the crypto industry forms a major stumbling block to the passing of the bill and is a sign that the industry gains further recognition? The debate put crypto on a lot of people’s minds where it has not been before and is the kind of advertising that money can’t buy.
On the other hand, it is a clear sign for increased regulation and the goal to close the gap between taxes being owed and revenue collected by the IRS (i.e. cracking down on tax evasion) that is high on the regulatory agenda. A reminder for everyone involved in the industry to prepare for that.
Crypto assets like Bitcoin are treated as property by the IRS. This means that every capital gain or loss that results from exchanging, spending, or selling the asset is a taxable event that has to be reported in Form 8949.
Taxation applies to fiat to crypto, crypto to fiat, and crypto to crypto trades. On the upside, crypto investors can benefit from long-term capital gains that are taxed at 0–20% compared to short-term capital gains taxed at marginal tax rates up to 37%.
Blockpit Cryptotax users get a fully tax compliant solution for their crypto trading based on the current state of the U.S. tax law.
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Disclaimer: The information provided in this blog post is for general information purposes only. The information was completed to the best of our knowledge and does not claim either correctness or accuracy. For detailed information on crypto regulations, we recommend contacting a certified legal advisor in the respective country. If any questions occur, feel free to contact us on our social media channels.
Originally published at https://blog.blockpit.io on September 2, 2021.