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New tax rules and guidance are continually released. It’s up to you, or your accountant, to be up to speed on the tax implications of these new rules each year. Tax rates go up and down, tax brackets move, and reporting requirements change. When it comes to crypto taxes, the rule changes have been at times both dramatic — and necessary. Lack of clarity from the Internal Revenue Service (IRS) was particularly notable during the 2010s, until the end of the decade was on the horizon. More recently, the guidance from the IRS has been better as specific guidelines have been laid out for how to treat certain activities like crypto mining.
In general, purchased or acquired crypto is taxed as either a capital asset (for capital gains taxes) or as income (which incurs income taxes based on your tax bracket). We’re going to cover some of the new rules and implementations that will be hitting the rule books in 2023 and 2024. Please note that these rules have been either implemented or proposed and may be subject to change during the course of 2023. Their current status has been noted below.
New Crypto Tax Rules for Institutions
In general, the new crypto tax rules largely affect institutions such as crypto exchanges and banks. The requirements for individuals are largely the same. The relevant crypto tax law changes were passed in the Bipartisan Infrastructure Deal in November 2021 and went into effect in January 2023.
The law refers to these institutions (such as crypto exchanges) as “brokers” and will change how they must track and report their customers’ crypto activity. This includes reporting the cost basis, sales, and other transfers of customers. Controversial within the crypto industry particularly, it now seems that the IRS is not going to enforce this broker requirement and will be delaying it until further notice. Many are hoping to see this requirement rolled back or removed prior to any future enforcement.
New Crypto Tax Rules for Individuals
The new 1040 Form will now ask whether or not you hold “digital assets” instead of “digital currency” as it previously asked. This is ostensibly to provide clarity for taxpayers so that they know that in addition to bitcoin (BTC) and other cryptocurrencies being taxed, they also may need to pay taxes on non-fungible tokens (NFTs) and other digital assets not typically thought of as cryptocurrencies.
Related to the new rules for “brokers,” you’ll be required to complete a W-9 form and submit it to your broker (a crypto exchange in most cases). This gives you a taxpayer identification number that lets your broker report your crypto activity to the IRS (at the time of writing, enforcement of this is delayed).
The Bank Secrecy Act (BSA) of 1970 requires both institutions and businesses to report cash transactions of $10,000 USD or more (with some exceptions, like gifts). This same requirement will begin applying to crypto transactions that meet this threshold in 2024 for people that engage in crypto trading or business activity within the U.S.
Possible Crypto Tax Rule Updates and Changes
In June 2022, legislation was first proposed that would classify decentralized autonomous organizations (DAOs) as business entities for tax purposes. They would also need to be incorporated as a partnership or limited liability company (LLC). As a DAO is neither an individual, group, or business (at least in the traditional sense), this is expected to provide regulatory clarity. However, as a DAO is a blockchain-based organization run by code and smart contracts, it is unclear exactly who would be required to register an applicable DAO. This legislation is expected to be reintroduced in 2023.
There is also the Digital Asset Anti-Money Laundering Act (DAAMLA), first proposed last year and expected to be proposed again in 2023 by Senator Elizabeth Warren. This would require crypto users and developers to set up anti-money-laundering (AML) protocols that are normally applied to financial institutions (requiring registration as a money service business). This would include crypto miners and even crypto wallet companies. It would also require developers to get permission before publishing their code — and collect information on anyone using it. Critics point out that this requirement would be counter to the U.S. constitution; the U.S. Supreme Court has repeatedly ruled that this would violate the First Amendment.
Further, some of the requirements in this legislation would be impossible to enforce. One requirement is that wallet providers must report users’ transactions and their identity to the government. This is simply not possible with most public blockchain protocols. It also bans the use of any privacy-enhanced protocol or blockchain network.
For crypto purists, cryptocurrency was designed to be an alternative to the legacy financial system. Many in the crypto industry have been banding together to advocate for—and promote—more and practical legislation. They also have been supporting crypto-favorable candidates from both parties. While the passing of these future proposals is still an open question that will be debated in Congress and in the public square, it would be wise to follow the current crypto tax laws as they apply to your specific situation.
- Financial institutions that deal in crypto are now technically considered brokers and have to report customers’ crypto transactions. This rule has ostensibly been delayed until at least 2024.
- The latest Form 1040 asks if an individual held “digital assets” as opposed to “digital currency.” This generalizing language makes it more clear that NFTs are also considered taxable.
- The Digital Asset Anti-Money Laundering Act is a highly controversial bill that will be reintroduced in 2023. If enacted, it would create onerous reporting requirements on wallet providers, developers, and crypto users.
Disclaimer: This crypto tax series is merely for informational purposes and should not be considered legal or tax advice. Please solicit the services of a crypto knowledgeable certified public accountant, tax professional, or lawyer should you need further guidance.