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Cryptocurrency investors and their brokerage firms in the United States are waiting for a tax rule that will fundamentally change how they report cryptocurrency taxes. However, the U.S. government has yet to provide any clear answers on this issue, even though several prominent senators are urging the Treasury Department to expedite the process.
In fact, the Internal Revenue Service (IRS), which is under the Treasury Department, completed this proposal several months ago to the extent that it was ready for formal internal review by the White House. However, the proposal has not progressed to the final public release stage. Speculation within the industry suggests that the White House may be delaying this proposal due to other cryptocurrency-related policy issues taking precedence in Washington.
Once implemented, this proposal will standardize how cryptocurrency companies report customer tax information, similar to Form 1099, which traditional brokerage firms submit summarizing gains and losses. Potential concerns within the industry include whether companies will be required to provide information they cannot obtain, or if cryptocurrency companies not directly related to clients, such as mining companies, will be involved.
On the positive side, this proposal could eliminate one of the main objections to cryptocurrencies – the difficulty investors face in addressing their tax issues. Many industry experts believe that when cryptocurrency taxation is handled in a way similar to other financial investments, it signifies another step towards proper oversight by the U.S. government. While the proposal may be ready, Cody Carbone, head of policy at the Chamber of Digital Commerce, suggests that "resistance from the White House" could hinder its implementation. It may be due to concerns that this rule would legitimize the cryptocurrency industry at a time when Washington is actively debating legislation regarding the digital asset market and stablecoins. Nevertheless, there are also rumors that the IRS may release the proposed tax rules at any time. "We can't wait. Because we want to know what we need to report so that we can comply," Carbone said.
Legal provisions associated with this tax rule, implemented in 2021 as part of the Infrastructure Investment and Jobs Act, aim to comprehensively identify cryptocurrency traders with transactions exceeding $10,000. However, this law poses many complex questions, such as how companies should handle clients manipulating funds using private wallets, and how broker records will handle interactions on decentralized platforms. Therefore, implementing more comprehensive tax regulations in the cryptocurrency field has become a top priority.
Whenever asked about the delay in these tax filing rules, the Treasury Department tells CoinDesk, "The Treasury Department is working diligently to publish these important and complex regulations as soon as possible." The White House has not responded to requests for comments.
Lawrence Zlatkin, head of the tax department at Coinbase Inc., one of the most prominent U.S. companies, stated regarding the delay, "We shouldn't be under a cloud of uncertainty." Coinbase Inc. will be guided by the new rules in the future. "Since our customers should report cryptocurrency activities on their tax returns anyway, we should be transparent and provide them with information so they can report correctly." Coinbase has established a series of infrastructures and prepared as much as possible to help investors understand their tax liabilities. This involves informing clients about their investment gains and losses, what needs to be reported, what is taxable, what is not, and what questions they should ask their tax advisors to ensure they have a certain level of understanding when doing these things on Coinbase. Therefore, waiting during this period is "very frustrating because you cannot prepare without knowing what these rules are," he said.
In December 2022, the IRS assured the industry that it could continue to operate under existing laws and regulations until the new tax rules were finalized. To do this, the IRS stated that it "will issue a proposed rulemaking notice, list the proposed regulatory text, explain the proposed rules, solicit public comments, and announce public hearings." Only after completing all of these steps, including the unusual and potentially time-consuming process of holding public hearings, can the IRS begin to analyze public feedback and draft the final version.
The chances of implementing this rule in 2024 are unlikely. Proposing, collecting public opinions, and eventually implementing a new tax rule typically takes several months, and it may even extend to the next year, which would exceed the 2023 tax year, although it should have been prepared for the 2024 filing.
Miles Fuller, a former IRS lawyer who joined TaxBit, a tax software company specializing in cryptocurrency, after leaving the IRS last year, said, "If you read it, you can see that the goal is that all of these places need to collect data during the current tax year so they can generate these forms and distribute them." Fuller, who has a background in tax law, finds it "very strange" that this rule has passed its final pre-release step but is still locked within the Treasury Department. He said it is not realistic for these rules to take effect before January 1, 2024, as it would not only be a challenge for the industry to adapt and comply, but it is also a systemic problem for the IRS to prepare to absorb and analyze a large amount of new data.
Some U.S. lawmakers are not ready to accept a delay until the next tax year for the tax rules. U.S. Senators Elizabeth Warren (Democratic-Massachusetts) and Bernie Sanders, among others, sent a letter last week to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel. The letter states, "We urge you to act swiftly to implement robust reporting rules for cryptocurrency brokers."
The letter suggests that implementing these rules can prevent tax evasion, earn billions of dollars in taxes for the U.S. government, and enable the IRS to identify and pursue the most serious tax evaders. Tax evaders and cryptocurrency intermediaries willing to help them will continue to exploit the system and siphon off billions of dollars from the U.S. government's pockets as long as there is an opportunity. As for concerns in the industry that "the proposal may cover too broad a definition of 'brokers' who must comply with this regulation," the Treasury Department wrote to lawmakers in early 2023, assuring them that companies usually unable to access client information, such as cryptocurrency miners, would not be included.
Currently, the IRS has not publicly stated that it will implement this tax rule in 2024. Carbone said, "The IRS has always told us that it won't delay. So, accountants and tax service providers in the industry are currently planning as if these broker reporting rules will be implemented as specified." |
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Post time 10-10-2023 13:39:36