On November 15, 2021, President Biden signed the $1.2 trillion “Infrastructure Investment and Jobs Act” (the “Act”), commonly referred to as the “infrastructure bill.” The Act allocates funding and other resources focused on roads and bridges, water infrastructure, resilience, internet, and cybersecurity, among other areas. In addition, it includes some new legislation crypto investors should know about.
The government’s major source of revenue comes from taxpayers’ tax money. In order to fulfill large amounts of bills like infrastructure bills, it would need to increase its revenue. Therefore, President Biden was language to increase the tax reporting requirements for cryptocurrency transactions, because it is supposed to bring in more tax revenue in about $28 billion over a decade.
Starting January 2023, crypto exchanges such as Coinbase will be required to record trading transactions, tracking them for customers and the IRS. Similar to the way stock brokers currently do via tax form 1099-B. The cryptocurrency brokers will have to report their customers’ names, addresses, social security numbers, and gross proceeds from sales with any capital gain/loss to the IRS. Also, businesses that receive payments of $10,000 or more in crypto must report the identity of the sender to the IRS. Just like the way that businesses currently need to report cash transactions of more than $10,000 to the IRS with the senders’ identities.
What does it mean to Crypto Investors?
First, the government is started to target taxpayers who are under-reported or mistakenly reported with their crypto trading profit. Due to the uncertain guideline of crypto tax reporting, the issue of under-reporting or mistakenly reporting are common. As a result, it could strongly affect the government’s revenue streamlining.
Second, the new requirement will create tax reporting challenges for many crypto investors with the crypto wallets. If investors trade crypto from their crypto wallet instead of crypto exchange, the information reported to the IRS on the 1099 form will be inaccuracy since the exchanges reporting on trading activity will have a limited view into what these investors paid for crypto in the first place. However, it will be a major problem for tax reporting if the 1099 form that the IRS has is different than what you report on your individual tax returns.
What should Crypto Investors Do in Respond to it?
There are two recommended methods for crypto investors to stay on the right side of the new law pertaining to their investments.
First, always keep track of your cost basis. You will need to record of what the fair market value of your crypto when you brought it, as well as record its fair market value when you used it or sold it. The good record-keeping will be louder than action. It will help you to calculate your investment profit and loss, to report a capital gain or loss on your tax returns, and more importantly to prove to the IRS or anyone that you are handling the tax reporting for crypto correctly.
Second, finding a crypto-knowledgeable tax professional could be even more helpful in accurately reporting your crypto investments. When the number of trading transactions is increased dramatically, and it would be difficult to track down everything by yourself. Now, it is a good time to find a crypto-knowledgeable tax professional who can assist you with record-keeping and tax reporting.
Last But Not Least
While not paying taxes on the crypto trading gains due to under-reported or mistakenly reported might be an honest mistake, don’t expect the IRS to take pity. It is always not recommended.
If you feel you are under-reported or mistakenly reported your crypto gain for the past years, you should talk to a tax firm, who familiars with crypto tax reporting, to see how to fix the errors from the past years and remain in good standing moving forward.
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