How Will New Laws Affect Crypto Investments in the US?

Pedro Rezende, King’s College London

New regulations for cryptocurrencies could impact many US investors. Although it may become easier to report taxes on crypto, the IRS has set out to catch crypto tax evaders. In order to better comprehend the situation, it is vital to understand the current legislations on these digital assets in the US.

Taxation and Legislations

In the US, cryptocurrencies are accounted as an asset similar to property, and are therefore taxed as such by the IRS (Internal Revenue Service) (Argawal). Americans who purchase crypto do not have to report that for tax purposes, based on the guidelines on Form 1040 tax return (Little). However, any capital gains made on virtual currencies, must be reported to the IRS once exchanged. That includes exchanging crypto for US dollars, purchasing one virtual currency with another or even buying goods and services with crypto (Little). Every time a trade is placed, that is considered as a taxable event, which must be accounted for. Moreover, taxes must be paid when coins are mined and sold to a third party (Argawal). In this case, the price of the coin at the time it was mined counts as gross income, whose tax ranges from 10 to 37% (Woodward).

This process can become extremely impractical for individuals who trade crypto on a daily basis, due to the need to report gains for every single transaction (Steverman et al.). In comparison to stocks, the process is more complicated due to the fact that crypto brokers are not required to send tax forms to clients, unlike traditional stock brokerages (Steverman et al.). This is one of the challenges arising from DeFi (Decentralized Finance); the potential fiscal instability and difficulty to regulate it, which in turn, can lead to tax evasion (White). For this reason, the IRS has made it one of its top priorities to combat people who avoid paying taxes from the exchange of cryptocurrencies and other non-fungible tokens (NFTs) (Steverman et al.). 

Law Enforcement and its Implications

Taxing crypto traders has been also made a top priority due to the potential revenue that this market is able to generate for the US government; it is estimated that the combined value of cryptocurrencies is close to $2 trillion (Silverman). Taxing crypto gains more heavily would allow the US government to raise money to fund the newly approved $550 billion bipartisan infrastructure bill passed by the senate in early August (Lobosco & Luhby). The CBO (Congressional Budget Office) has estimated that the US could raise about $50 billion by enforcing taxation within the crypto industry (Lobosco & Luhby). This would come as an alternative to increasing income taxes in the US, a move that would be politically unpopular for the Biden administration.

To conclude, increasing taxation and enforcement on crypto investments in the US could backfire, as crypto traders could decide to flee the country. However, this is a bet the IRS is willing to take, as it has been able to previously crack down on foreign tax evasion by obtaining details of American clients in Swiss banks (Steverman et al.).

References

Agarwal, Kushal. “Are There Taxes on Bitcoins?” Investopedia, Investopedia, 21 July 2021, http://www.investopedia.com/articles/investing/040515/are-there-taxes-bitcoins.asp. 

Brett, Jason. “Congress Has Introduced 18 Bills on Crypto and Blockchain in 2021.” Forbes, Forbes Magazine, 23 Aug. 2021, http://www.forbes.com/sites/jasonbrett/2021/08/22/congress-has-introduced-18-new-bills-on-crypto-and-blockchain-in-2021/. 

Little, Kendall. “Yes, Your Crypto Is Taxable. Here’s How to Report Virtual Currency to the IRS.” NextAdvisor, Time, 17 May 2021, time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-tax-guide/. 

Lobosco, Katie, and Tami Luhby. “Here’s What’s in the Bipartisan Infrastructure Bill.” CNN, Cable News Network, 23 Aug. 2021, edition.cnn.com/2021/07/28/politics/infrastructure-bill-explained/index.html. 

Silverman, Gary. “The Crypto Crowd Gets Loud and Proud on Capitol Hill.” Financial Times, Financial Times, 14 Aug. 2021, http://www.ft.com/content/c4bf4b3b-70fb-4688-9043-5dc6f5d03b68. 

Steverman, Ben, et al. “Crypto Investors Get Ready for More Taxes — but Clearer Rules.” Bloomberg.com, Bloomberg, 31 July 2021, http://www.bloomberg.com/news/articles/2021-07-31/taxes-on-bitcoin-congress-pushes-to-make-sure-traders-report-pay-irs. 

White, Josh. “This Week in Tax: US TAX Crackdown on Cryptocurrencies.” International Tax Review, International Tax Review, 21 May 2021, http://www.internationaltaxreview.com/article/b1rxvb6rtrfph2/this-week-in-tax-us-tax-crackdown-on-cryptocurrencies. 

Woodward, Justin. “IRS Guidance on Cryptocurrency Mining Taxes.” TaxBit, 3 June 2021, taxbit.com/blog/2019-10-21-irs-guidance-on-cryptocurrency-mining-taxes. 

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