Interpretation of the new U.S. cryptocurrency reporting bill

Source: TaxDAO

On the tax front, the U.S. may be unprepared for the investor craze surrounding spot Bitcoin ETFs. There are new tax laws in the United States, but no guidelines.

The U.S. Securities and Exchange Commission (SEC) has approved a spot Bitcoin exchange-traded fund (ETF). When it happens, many believe everything will change. But is America ready for the onslaught of first-time cryptocurrency investors? In terms of tax compliance, maybe not yet.

Cryptocurrency investors must pay taxes on their profits, just like when investors sell stocks, bonds, and real estate. This is obvious, but the reasons for this remain unresolved.

Jerry Brito, CEO of the cryptocurrency lobby group Coin Center, wrote in a blog post on January 2 that as things stand, "compliance is nearly impossible"< Cryptocurrency tax reporting obligations, especially given a provision that was added a few years ago as part of the U.S. Infrastructure Investment and Jobs Act. The provision, which takes effect on January 1, 2024, amends U.S. tax law to "require any person who receives $10,000 or more of cryptocurrency in the course of a transaction or business to report the transaction to the IRS," Brito pointed out.

This may seem inconsequential, Brito asked, but if a Bitcoin miner receives a block reward of more than $10,000, then as the law now states, "whose name, address, and society do they need to report?" Insurance number". Or say you "participated in an on-chain decentralized cryptocurrency exchange, so you received $10,000 of cryptocurrency, who do you report to?" How do you determine if the amount of cryptocurrency equals $10,000? Britons noted that "the law is silent on this matter, and the IRS has not issued any guidance to answer these and other questions."

Are the reporting obligations really so onerous?

But are the new requirements really that vague? Will they disincentivize potential investors and hinder cryptocurrency adoption in the United States, as some have warned? Perhaps U.S. law and rule makers should follow Swiss, British, or Singaporean tax frameworks in the hope that cryptocurrencies become mainstream.

Omri Marian, a law professor and academic director of the graduate tax program at the University of California, Irvine, disagreed with Brito when asked whether most investors would indeed have difficulty complying with current U.S. tax laws regarding cryptocurrencies. “The law only applies to payments over $10,000 in the context of ‘commercial trade’, which is a proper term,” Marian told Cointelegraph.

"For example, if I'm a car dealer and I sell a car for $10,000 cash, I have to report the buyer to the IRS. I can do that because I know who the buyer is. The law does the same for selling goods and services in exchange for cryptocurrencies."

If car dealers or any other business owners can comply in a cash sales environment, then buyers using cryptocurrencies and So can sellers. "The medium of exchange makes no difference," Marian said.

But what about Bitcoin miners, one of the specific examples cited by Britons? "In the vast majority of cases, miners are not considered to be engaged in 'trade or commerce' under current law," Marian said, meaning the requirement does not apply to them. It is also "extremely unlikely" that Bitcoin miners would receive $10,000 or more from a single person whose transactions the miner verified, "so again the law does not apply," he added.

Nonetheless, the IRS has not issued any guidance in this regard.

Shehan Chandrasekera, head of tax strategy at CoinTracker, told Cointelegraph that “it is too early to conclude that compliance is almost impossible.” However, it will certainly be a challenge in the short term.

Chandrasekera noted that although the law took effect on January 1, the IRS has not yet issued any regulations or updated its Form 8300 to facilitate reporting of digital assets, adding: “Until these regulations are in place, we One can only speculate on what exactly digital assets need to report."

Only a few people will be affected

Nathan Goldman, associate professor at North Carolina State University's Poole School of Management, told Cointelegraph ,The new rules will not affect most cryptocurrency traders, as most trades will not reach the $10,000 threshold.

However, investors who trade large amounts of cryptocurrencies may be affected by seemingly vague terms. For example: "If you sell one Bitcoin to someone, you will exceed the $10,000 limit and you will have to report the transaction to the IRS. If this is a routine transaction to someone you know, it will still be a little abrupt," Because you need to get their name, address, social security number, and other information. "However, you can comply."

"Conversely, if this was to an unknown party, a cryptocurrency trading company, or another similarly sized company, it would be unclear how to record the transaction."

The IRS also has no guidance on this, Goldman added, which could be particularly worrisome for those who have made more than $10,000 in transactions in 2024, especially given the non-reporting of transactions 15 days before it becomes a felony.

How is DeFi trading?

Nonetheless, could the unique decentralized nature of cryptocurrencies cause problems with some reports? Take the decentralized finance (DeFi) exchange mentioned above by Brito as an example.

“Currently, it is virtually impossible to comply with reporting requirements,” Miller Whitehouse-Levine, CEO of DeFi Education Fund, told Cointelegraph. What the 60 million Americans who own digital assets today want are “fit-for-purpose tax provisions” that essentially treat cryptocurrencies as just another case.

Treating cryptocurrencies as a special case and tailoring the rules will "improve tax compliance overall and provide the clarity needed to promote domestic innovation," Miller continued. He added that this approach has even been adopted in some places: "The United Kingdom is a model that the United States may follow, especially in terms of taxation of DeFi transactions." Miller recalled that in 2023, the United Kingdom will actually “A call was made on how best to tax DeFi transactions,” suggesting that the UK is aware of the novelty of new technologies and the fact that there are “new frameworks specifically tailored for digital assets.”

Others, however, believe that cryptocurrencies are more similar than different from other financial transactions and therefore do not require special legislation or rules.

“In the context of DeFi, if you choose to sell something to someone for $10,000 worth of cryptocurrency and don’t know who that person is, so you can’t declare it, then you make It’s a conscious choice to break the law. Likewise, if I choose to sell anonymously to someone for cash, I’m breaking the law,” Marian said, adding: “The bottom line is that in almost all cases, people can comply, Because they can actually identify the buyer, or because the reporting requirements do not apply to them.”

But if we still assume that cryptocurrencies are a special case, they should have their own specific tax framework. So what changes does Congress need to make?

Goldman believes that “Congress should consider adding a minimum exemption, like the exemption for foreign currency transactions, to limit small-scale, innocuous reporting requirements that may surround cryptocurrencies.” This would allow taxpayers to Avoid tax liability every time you make a crypto transaction.

Are there risks in using cryptocurrencies?

If Congress takes no action (clarifying what is included in cryptocurrency transaction reporting), will it affect the adoption of cryptocurrency in the United States? "I believe it will," Goldman replied, "but I also don't think it's a bad thing at this point."

He further explained that Congress has been very careful not to impose too many restrictions on cryptocurrencies. Too many or too few restrictions. In some ways, the United States has allowed cryptocurrencies to follow their own path through inaction. He said that while the new reporting regulations may hinder short-term adoption, they will not be a hindrance in the long term.

Marian believes that Congress’s inaction will not harm the adoption of cryptocurrency in the United States. “To date, cryptocurrencies have had little formal tax guidance in the United States and have largely operated within the existing tax framework. However, cryptocurrencies have ‘miraculously’ remained on the rise in the United States and have continued to do so since their launch So," he said.

At least to Marian’s knowledge, there is no empirical evidence that market movements are related to U.S. tax guidance on cryptocurrencies. “If people don’t adopt cryptocurrencies more broadly in the U.S., it has nothing to do with tax (treatment).”

Given everything else going on in the world, people probably shouldn’t expect Congress to take action on cryptocurrencies right now take action. Assuming that is currently the case, at least in the short term, what is the most important thing retail investors should know about cryptocurrency tax reporting in 2024?

“Investors need to carefully record their transactions,” Goldman said. “As the IRS’s focus on cryptocurrencies continues to increase, taxpayers must be able to prove their transactions. I expect the IRS will increasingly pressure this area and investors must prove their transaction."