Crypto tax: IIIA Act gets an update
2023-03-31 05:12:46 ET
On February 24, the US Office of Information and Regulatory Affairs updated the status of the pending crypto regulation, the IIJA Act, which will require crypto brokerage firms to submit customer transactions to the IRS.
This update will have implications and investors may be interested to know how it affects their crypto treasure.
However, taxes are hard to come by, so we spoke to Miles Fuller, director of government solutions at TaxBit, the crypto tax company, to find out more.
Invezz (IZ):
Can you elaborate on the changes this new update (6045a) brings about reporting requirements for brokers?
Miles Fuller (MF):
The broker reporting regulations under IRC 6045 and 6045A enacted in November 2021 will accomplish a few different things.
First, it requires digital asset brokers to provide customers and the IRS with 1099 forms that show the revenue and, in most cases, the cost basis of digital assets sold by a customer during the year.
Second, to facilitate the ability of brokers to report the cost basis of assets sold, it imposes a transfer statement requirement similar to that in place for traditional securities. This requirement means that if a customer moves an asset from broker A to broker B, broker A will tell broker B what the cost base was in the transferred asset.
The current uncertainty with these new rules is how the Treasury defines digital asset brokers. This has been a lingering question. Proposals for regulations implementing how these rules are to be implemented, as well as who is the broker, are expected in the near future.
From:
What effect will this have on crypto investors, or the industry at large?
MF:
The new reporting rules will be a huge benefit to crypto investors and an indirect benefit to the industry as a whole.
At investor level, the new rules will make tax reporting significantly easier. Historically, tax-specific information for digital assets has been very difficult to obtain. Many exchanges provided transaction data, but this data was not always complete or difficult to interpret for tax purposes.
By introducing the new reporting rules, individual investors will receive tax-specific information about their transactions. This information will make tax reporting much easier.
At an industry level, the new rules will place a burden on entities that fall under the definition of digital asset broker. These brokers must now provide information that they previously did not have to provide.
Although the rules impose a burden on the brokers, the new rules will probably benefit the brokers in the long run. As digital assets become more mainstream, regulatory oversight (beyond tax) will continue to grow.
The new tax reporting rules move the industry towards more standardized and easy-to-interpret data. This move will make other regulatory requirements easier to meet, and will benefit the industry in the long term.
From:
Do you think US tax law has evolved sufficiently to this point in the digital asset economy, or do you think it still lacks a lot of clarity? Would you like to see something changed?
MF:
Tax legislation has not really developed in the digital asset area other than the adoption of rules requiring information reporting from digital asset brokers. These rules have not yet been implemented as the industry is waiting for the Ministry of Finance to propose regulations.
That said, digital assets are treated as property under the tax code, which provides a lot of insight into the tax treatment of digital assets, but there are definitely still gaps.
Distributed ledger technology is giving rise to new and unique financial arrangements that don’t quite fit into the tax code, meaning policymakers still have to step in and decide what the proper tax treatment should be.
The Treasury Department recently released its explanation of the revenue proposals in the Biden administration’s budget plan for the next fiscal year. These proposals touched on some digital assets that are aimed at filling some of these gaps and bringing digital wealth tax treatment more clearly in line with other financial instruments.
It also included proposals that would ease the US’s ability to work with treaty partners to share information about digital assets, which is likely to be beneficial given the ecosystem’s international operations.
From:
How do US crypto tax laws compare to other countries? Would you describe it as tax-friendly?
MF:
It really depends. In the US, digital assets are taxed the same as any other property, so there isn’t really an attempt by the government to treat them more or less favorably than other types of property.
Other countries have a similar approach. But there are some countries that make a concerted effort to treat digital assets more favorably for tax purposes or less favorably.
Ultimately, the US is likely to be in the middle, using an approach aimed at adapting the tax treatment of digital assets to be consistent with other similar types of property.
From:
Do you have any idea what percentage of US crypto users avoid paying taxes?
MF:
It has been our experience that it is less about people trying to avoid taxes and that one element that causes tax errors in the digital asset space is simply the administrative difficulties of filing taxes accurately.
Currently, the data available to individuals for use in filing taxes is often difficult to interpret and sometimes incomplete. This makes it very difficult to actually file your tax return accurately.
That is what we at TaxBit are working to solve – initially through software aimed at individual taxpayers, but now with software aimed at stock exchanges and platforms so that they can provide their customers with better and easier to understand information.
From:
Do you think there will be more changes going forward to crypto in taxes, especially in light of the recent deregulation we’ve seen (like BUSD shutdown and more SEC penalties on big firms)?
MF:
We believe that there will continue to be an evolution in the tax treatment of digital assets. As Congress continues to gain a better understanding of the ecosystem and where the difficulties are, it will likely take steps to refine the tax treatment in some way.
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