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On Feb 24th, the US Office of Information and Regulatory Affairs updated the status of the pending crypto regulation, IIJA Act, which will require crypto brokerage firms to submit client transactions to the IRS. 

This update will have implications, and investors may be interested to know how it affects their crypto taxes. 

Taxes are difficult to get one’s head around, however, so we spoke with Miles Fuller, the director of government solutions at TaxBit, the crypto tax company, to find out more. 

Invezz (IZ): Can you elaborate on the changes this new update (6045a) provides around reporting requirements of brokers?

Miles Fuller (MF): The broker reporting regulations under IRC 6045 and 6045A that were passed in November 2021 will accomplish a few different things.  

First, it requires digital asset brokers to provide customers and the IRS with 1099 forms that show proceeds and, in most cases, the cost basis for digital assets that were sold by a customer during the year.  

Second, in order to facilitate the ability for brokers to report the cost basis of assets sold, it imposes a transfer statement requirement similar to what is in place for traditional securities. This requirement means that if a customer moves an asset from broker A to broker B, broker A will tell broker B what the cost basis was in the transferred asset.  

The current uncertainty with these new rules is how the Treasury Department defines digital asset brokers. This has been a lingering question. Proposed regulations implementing how these rules will be implemented as well as who is a broker are expected in the very near future.

IZ: What effect will this have on crypto investors, or the industry at large?

MF: The new reporting rules will be a huge benefit for crypto investors and an indirect benefit to the industry as a whole.   

At the investor level, the new rules will make tax reporting significantly easier. Historically, tax-specific information for digital assets has been very hard to obtain. Many exchanges provided transaction data but that data was not always complete or was difficult to interpret for tax purposes. 

By imposing the new reporting rules, individual investors will receive tax-specific information about their transactions. This information will make tax reporting much easier.  

At an industry level, the new rules will impose a burden on entities that fall into the definition of digital asset broker. These brokers will now need to provide information that they previously did not need to provide.

Although the rules impose a burden on brokers, the new rules are likely to benefit brokers in the long run. As digital assets become more mainstream, regulatory oversight (beyond tax) will continue to grow. 

The new tax reporting rules move the industry toward more standardized and easy-to-interpret data. This move will make other regulatory requirements easier to meet, benefiting the industry in the long run. 

IZ: Do you think US tax legislation has developed sufficiently to this point in the digital asset economy, or do you think it still lacks a lot of clarity? Would you like to see anything changed?

MF: Tax legislation has not really developed in the digital asset area other than the passage of rules requiring information reporting by digital asset brokers. Those rules have not yet been implemented as the industry is waiting for the Treasury Department to propose regulations. 

With that said, digital assets are treated as property under the tax code which provides a lot of insight into the tax treatment for digital assets but there are definitely still gaps.  

Distributed ledger technology is giving rise to novel and unique economic arrangements that do not fit squarely in the tax code, which means policymakers do still need to step in and decide what the right tax treatment should be. 

The Treasury Department recently released its explanation of the revenue proposals contained in the Biden administration’s budget plan for the next fiscal year. Those proposals touched on some digital asset items that are directed at filling some of these gaps and bringing digital asset tax treatment more clearly in line with other financial instruments.

It also included proposals that would ease the ability of the US to work with treaty partners on sharing digital asset information which is likely a benefit given the ecosystem’s international operations.

IZ: How does the US’ crypto tax laws compare to other countries? Would you describe it as tax-friendly?

MF: It really depends. In the US, digital assets are taxed the same as any other property so there is not really an effort by the government to treat them more or less favourably than other types of property. 

Other countries are taking a similar approach. But there are some countries that are making directed efforts to treat digital assets more favourably for tax purposes or less favourably.  

Ultimately, the US is probably in the middle, employing an approach that is directed at aligning the tax treatment of digital assets to be consistent with other similar types of property.  

IZ: Do you have any idea what percentage of US crypto users avoid paying taxes?

MF: It has been our experience that it is less about people trying to avoid taxes and that one element causing tax mis-compliance in the digital asset space is simply the administrative difficulty involved in filing taxes accurately. 

Currently, the data available to individuals for use in filing their taxes is often difficult to interpret and sometimes not complete. This makes it really difficult to actually file tax returns accurately. 

That is what we at TaxBit are working to solve–initially through software directed at individual taxpayers, but now with software directed at exchanges and platforms so they can provide their customers with better and easier-to-understand information.

IZ: Do you think there will be more changes going forward to crypto in tax, especially in light of the recent regulatory clampdown we have seen (such as BUSD shutdown and several SEC penalties on big firms)?

MF: We do believe that there will continue to be an evolution to the tax treatment of digital assets. As Congress continues to gain a better understanding of the ecosystem and where the difficulties are, it will likely take steps to refine the tax treatment in some way or another.  

The post Crypto tax: IIJA Act gets an update – Interview appeared first on Invezz.

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