Investors in cryptocurrency will possibly face higher taxes due to the Infrastructure Bill which will crack down on future IRS reporting.
Investors will be required to disclose yearly cryptocurrency activities by checking a box on their tax returns. Due to the complicated and lengthy rules coming out of Washington, most filers haven’t a clue what transactions must be reported. Even though crypto purchase will not end up as a tax bill, converting it, trading it, or using it to make purchases could lead to tax costs. The amount taxed is the difference between the asset’s original purchase price, known as cost basis, and the value upon sale or exchange which can be difficult to determine.
In most cases, it shouldn’t be difficult to comply with IRS rules. At basic levels, crypto is subject to capital gains tax on net profits from sales. Cryptocurrency sold within one year of purchase is considered short-term capital gains and therefore taxed as income. Long-term capital gains rates range from 0% to 20%, depending on the level of income and could possibly include an additional 3.8% surcharge for filers with more than $200,000 in investment gains or modified adjusted gross income.
As a capital asset, crypto losses could offset gains in investments like stocks and/or real estate. If you recorded short-term trading losses in crypto, this could offset short-term gains in stocks or in reverse.
Form 1099-B, used by brokerages, will be required by the Infrastructure Bill to report profits an losses. One copy will go to the IRS and the second to the investors in order to report their activities on their tax returns. This will make it more difficult for those investors who try to sidestep the IRS. Even if investors do not receive Form 1099-B, they will still be held responsible for reporting and paying their crypto tax liability.
One change going into effect during the 2022 tax year could be closing the “wash sale” loophole for crypto. The Democrats’ infamous “Build Back Better” bill will include digital assets in standard wash-sale rules. Investors will not get tax write-offs on losses if they purchase “substantially identical” securities within the time frame of 30 days before or after a sale.
Some uncertainties may make it difficult to comply with the new rules. The IRS has not announced what certifies as a “Substantially Identical” crypto. That could be a problem because Bitcoin and other cryptos have spinoff tokens like Bitcoin Lite.
The new requirements could make it difficult for investors to conceal their actions and estimate their profits and losses for each transaction.
Currently, exchanges are agonizing to report capital gains or losses because brokers cannot comprehend the cost basis when assets move between self-custody wallets and brokers. If investors are not tracking this information they could end up receiving a much larger bill than expected or miss out on tax-planning opportunities. Many exchanges do not provide reports that are easy to understand but investors may use crypto tax software to gather data to appraise what they might owe.