The cryptocurrency industry was caught off guard last week when it was revealed that the Senate’s bipartisan infrastructure bill anticipated raising $28 billion in revenue by adding new reporting requirements that would enable the IRS to collect taxes already owed on capital gains from sales of bitcoin
and other digital assets.
The exact text of the bill is still being negotiated, but experts tell MarketWatch that the average crypto investor who uses a centralized exchange like Coinbase
or Kraken to buy and sell crypto assets should expect the IRS to know exactly how much money they made on those transactions, if the bill becomes law.
Under current law, crypto exchanges are not required to report losses and gains realized by their customers through the purchase and sale of digital assets, but the legislation being debated in the Senate will change that, meaning the IRS will know about taxpayers’ crypto income.
“There’s been a drastic underreporting of bitcoin gains, and one of the reasons is that these exchanges aren’t required to issue a report saying ‘hey, here’s your activity for the year,’” Tom Cardinale, a partner at the accounting firm EisnerAmper, told MarketWatch. “The IRS has been pushing Congress for more enforcement toward these exchanges and issuers of cryptocurrencies.”
Because exchanges will likely be required to issue their customers documentation like a 1099-B form detailing their gains and losses, it likely will not place too much burden on taxpayers to merely incorporate those figures into their annual tax filings, he said, though there will certainly be more Americans paying taxes on their crypto gains in the years to come if this bill becomes law.
The crypto industry remains concerned that the draft legislation will ensnare companies or entities that are not equipped to report the gains and losses of those they transact with. The legislation was amended over the weekend so that it doesn’t specifically require entities that provide non-custodial cryptocurrency services, or decentralized or peer-to-peer exchanges to report customer transactions.
Sen. Ron Wyden, an Oregon Democrat, pushed for the language to be amended in a series of tweets Sunday.
Jerry Brito, executive director of the think tank Coin Center, remains concerned that the IRS could interpret the legislation to require cryptocurrency miners — who lend computing power to a crypto network in order to verify transactions in exchange for digital assets — to report gains and losses of which they may not even be aware.
“Yes, there were concessions, but the latest language can still be interpreted by Treasury to cover miners, lighting nodes and the like,” he wrote Monday on Twitter. “If that’s not Congress’ intent, there are easy fixes they can adopt.”
Alma Angotti, a managing director at the consultancy Guidehouse, who formerly held senior enforcement positions at the Securities and Exchange Commission and the Financial Industry Regulatory Authority, told MarketWatch in an interview that the true effect of the law cannot be known until the Treasury Department issues regulations interpreting how they will enforce it.
Even though the language of the bill no longer directly mentions decentralized exchanges as entities that must report transactions, the IRS could interpret that law that way. “The devil is always in the details in these things, and they’ll want to write rules specific enough that people can comply, but broad enough that they’re not easy to get around.”
A decentralized exchange often takes the form of a peer-to-peer network, where software code matches sellers and buyers of a security. An outgrowth of so-called decentralized finance, these exchanges have attracted more than $100 billion in digital capital.
If decentralized exchanges are made exempt from reporting, “it could push transactions out of the regulated exchanges into the more, newer decentralized exchanges,” Angotti said. Even if they are not exempt from reporting, it is difficult to see how the IRS would require reporting, because “there is nobody to collect that information in a truly decentralized exchange.”