Cryptocurrency has gone mainstream. Once seen as an esoteric investing fad, currencies like bitcoin and dogecoin are as ubiquitous in the marketplace as tech stocks and Treasury bonds. But as crypto has attracted more novice investors, this burgeoning new market has led to a host of tax complexities, and federal regulators have their sights set on reining in the “Wild West era” of crypto.
To tighten reporting standards around cryptocurrency, the Biden administration’s infrastructure bill includes a provision that would treat these digital assets completely differently than they have been in the past. As a result, we will soon see a dramatic shift in how businesses, tax pros and individuals interact with the hottest investing trend in the market.
My colleague, Shaun Hunley, a tax consultant at Thomson Reuters and an expert in tax issues surrounding cryptocurrency, recently told me that, while seemingly innocuous, proposed changes to the way cryptocurrency is designated have the potential to create some serious landmines.
“Currently, for its purposes, the IRS treats crypto as property. But under a provision of the infrastructure bill, cryptocurrency would be treated both as property and a security,” he explained. “At first blush, it may not seem like a distinction to cause a significant impact, but the change would introduce inconsistencies across different regulatory agencies.”
Hunley explained that the bill does this in two key ways. First, by classifying crypto as a security, it would expand the definition of a broker to include crypto exchanges, such as Coinbase, Kraken and others. That’s important because currently, only brokers are required to send a 1099 form to crypto holders and to the IRS about a specific investor’s earnings. But with the government concerned about tax evasion and fraud, regulators hope holding exchanges to the same standard as a traditional broker will put a bigger regulatory onus on them and, as a result, limit the likelihood of misconduct.
What’s more, the bill will treat cryptocurrency transactions more like cash payments. Right now, if a business receives more than $10,000 in cash for any service or product, it has to file Form 8300 with the IRS. Traditionally, crypto is exempt from that requirement because of its designation as property. Making this change would apply to any digital asset valued over $10,000 (like a non-fungible token), so it will make filing an 8300 much more commonplace, and it could even deter businesses from accepting crypto as payment.
“For businesses, it adds complexity in tracking,” Hunley said. “How is this crypto treated for this purpose? If it’s treated as a security for broker rules, is that going to leak over to other tax issues. For example, the Wash Sale Rule says if an investor sells a security like stock for a loss and it offsets a bunch of gains and he takes that money and buys replacement stock at a lower price, he can’t use that loss. Initially, that rule didn’t apply to crypto, but now that you can treat crypto as a security for one purpose, it opens it up to being subject to the rule. That’s going to be a big adjustment that may take businesses a few transition years to sort.”
Businesses won’t be the only ones to take some time to get a handle on these changes. For individual tax preparers, the infusion of new regulations is an unwelcome complication at a time when crypto is so new to them. Often, sole practitioners or professionals at small and midsized shops don’t have the processes in place to calculate the gain or loss from crypto. That has left many in search of third-party vendors who they can pay to do that for them and integrate it into their tax software, a significant monetary investment for some shops.
But the group most likely to feel the biggest sting of these changes, Hunley says, is likely to be the crypto exchanges.
“That’s who is going to bear the biggest burden, because even though exchanges do some reporting right now, they don’t do it in the way that is spelled out in the infrastructure bill,” he said. “The bill says they need to report in a specific way, like you would for a stock, so they need to take specific steps to build out the foundation to ensure that they can comply, whether that’s hiring in-house tax people or building out a central reporting structure.”
One thing is for certain: With the infrastructure bill now a reality, change is upon us. All stakeholders — from preparers to investors to exchanges — have to get ready for a new era of crypto. Those who are vigilant in their compliance will reap the benefits, while those that aren’t will open themselves up to a whole new level of volatility.
