US delays tax reporting for crypto brokers
US authorities are delaying the implementation of new rules that oblige cryptocurrency brokers to report their customers’ gains and losses to the Internal Revenue Service.
These new rules are part of the Biden administration’s Infrastructure Act which brought digital asset firms under the controversial “broker” definition. Similar to stock brokerages, it makes crypto platforms subject to the IRS information reporting regime.
The new regulation was signed into law in late 2021 and was expected to come into force next month. If adopted, crypto exchanges will use a tax form known as the 1099-K to capture individual annual cryptocurrency activity subject to taxation. Out of the crypto domain, this tax form is typically given to a taxpayers who engages in transactions worth an aggregate $20,000 or more.
Citing the digitalized pseudo-anonymous nature of crypto transactions, the IRS said this allows taxpayers to conceal their crypto activities and relevant taxable income. Before that, the reporting burden lies with crypto traders only, so the authorities believe that obliging crypto brokers to generate 1099 Forms would help increase tax compliance.
The IRS has also addressed how to track the fair market value, capital gains, and losses in the context of virtual currencies. When a transaction is facilitated by a cryptocurrency exchange, the value of the taxed deal is the amount that was recorded by the platform in US dollars. Further, the taxpayer’s buy/sell price will determine whether a gain or loss has occurred as well as its duration.
The IRS said it plans to make public criminal tax-evasion cases involving cryptocurrency, which opens a new front in the agency’s burgeoning scrutiny of the industry.
As described further in the petition, though taxpayers are required to report any associated profits and losses on their crypto dealings, the IRS’s experience “has demonstrated significant tax compliance deficiencies relating to cryptocurrencies and other digital assets.”
At the very core, the IRS still deems crypto assets to be property rather than currency for income tax purposes, the same as its regulatory guidance came out seven years ago. That means the authority will continue to tax crypto profits and losses like those for stocks, at capital gains rates.
Based on its recent experiences with cryptocurrencies, the IRS believes that crypto transactions are not being properly reported on tax returns. Among other reasons, the authority says there is no third-party reporting to the IRS on such transactions, and previous summonses served on other cryptocurrency dealers have revealed significant underreporting of such transactions.
