How the New Infrastructure Bill (Yes, the Infrastructure Bill) Will Affect Crypto Investors
Updated: 2 days ago
The crypto ecosystem’s rapid growth and popularity are primarily due to its transparency and privacy. However, the new Infrastructure Bill, signed by President Joe Biden on Nov. 15, 2021, will obscure some of that transparency and includes tax provisions that apply to cryptocurrency.
If you aren’t a CPA, you may not understand some of the tax ramifications. Here’s what’s happening in Washington, how it could affect your crypto investments and tips to prepare for changes in the tax law:
Changes to Privacy Rules & the US Tax Code
One of the most talked about aspects of this bill is the change to the U.S. tax code reporting requirements. Section 6050I requires anyone who receives more than $10,000 in cash - by any means including PayPal, Venmo and various other cash apps - to file a report with the IRS. This includes cryptocurrency.
This change will affect your privacy. If you buy crypto from a Bitcoin ATM, an exchange or even a family member, or purchase something with crypto the seller is required to collect your personal details. While this is already being done by exchanges and Bitcoin ATM operators, not every entity – like Uncle Bob – that sells crypto is doing this.
The Electronic Frontier Foundation (EFF), a digital rights group, calls the bill, “a disaster for digital privacy.” Rainey Reitman, EFF’s chief program officer, says “the mandate to collect names, addresses and transactions of customers means almost every company, even those tangentially related to cryptocurrency, may suddenly be forced to surveil their users.”
This surveillance rule has been called “unworkable and arguably unconstitutional” by cryptocurrency lobbyists like the non-profit CoinCenter.
The good news is the new tax rule won’t take effect until 2024 and crypto lobbyists are working to make sure the language used to enforce it is clearly defined and provide as much privacy for investors as possible.
Clarifying the Reporting Language
The big issue is the cryptocurrency tax element of the law is not clearly written and the privacy factor will make it difficult to accurately report crypto sales to the IRS.
For example, the term “broker” is not clearly defined. Cryptocurrency advocates are concerned the language could potentially target those who won’t have access to the information needed to comply and that 1099s will not be sent or be inaccurate - leading to unnecessary audits.
For the IRS this will also be a complex tax to audit, especially for investors who use their own crypto wallet - which the IRS will have a limited view into what was paid for the investment in the first place.
According to Gibson and Dunn Law Firm, a positive short-term benefit is that because it doesn’t go into effect until 2024. This gives the IRS, Treasury Secretary and cryptocurrency industry experts time to work on “clarifying the scope of Section 6050I” for digital assets by concretely defining:
What “digital assets” are
Reporting requirement scenarios
The lines separating a “broker” and a private trader
Specifics on what crypto reporting requirements will be
While the language of the bill could leave some crypto enthusiasts in a vulnerable position with IRS reporting requirements, the goal of the industry is to make sure digital assets don’t get lost in translation or investments are moved overseas.
How You Should Prepare
For crypto investors that want to stay on the right side of the IRS, here are two tips to start preparing now for possible tax ramifications:
Keep Good Records: Because what is reported to the IRS may not be accurate, keep track of what you originally paid for your crypto in order to reconcile it with any 1099s you may receive.
Hire a Tax Professional with Crypto-Knowledge: Finding a knowledgeable tax professional is recommended for investors with more than $10,000 in crypto, especially if you plan to cash out or use it to make a purchase.
It isn’t a surprise the U.S. government is digging into digital wallets and proposing new regulations and taxes for cryptocurrency considering the phenomenal growth in just 2021 alone.
The future is bright for crypto. Today, Bitcoin ATMs are installed in virtually every continent with more than 34,000 machines available for quick purchases. In 2020 the global cryptocurrency market was valued at $1.49 billion, Bitcoin hit all-time highs in 2021 and projected growth is expected to reach $4.94 billion by 2030, according to Allied Market Research.
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