Biden’s New Crypto Tax: 2 Things You Need to Know
President Biden recently signed into law his $1.2 trillion bipartisan infrastructure bill, ushering in changes in transportation, social safety nets, broadband — and how your crypto gets taxed. Here are the main changes that may affect your crypto wallet.
One major provision will require brokers, defined as crypto exchanges, to officially report their cryptocurrency gains on a 1099-B form to the IRS. One of the main shakeups to the cryptocurrency market is that brokers will also have to disclose the names and addresses of their customers. Cryptocurrencies largely revolve, and thrive, under anonymity. You can buy, sell and exchange cryptocurrency without ever knowing where it originated, whom it belonged to and where it’s going. The government has now decided that is about to change.
A broker, or crypto exchange, must send a Form 1099-B to both the IRS and its customer. The customer will then use this information from the form to calculate their own preliminary gains and losses and report them on their own tax returns.
This can create problems, as the 1099 forms will only contain assets crypto exchanges store on your behalf — not crypto assets you own in your own self-custody wallet. If a crypto investor has a self-custody wallet and then buys crypto through an exchange, the government will only see what is done through the crypto exchange. It won’t see what was done with the self-custody wallet. So, if you were to sell bitcoins from your self-custody wallet to your Coinbase or other exchange wallet, the IRS would be able to determine the amount you sold it for but not your original purchase price, as the original purchase was done in self-custody, and as a result, is anonymous. Of course, you should report the purchase to the IRS on your own, but there is much room for error and discrepancies among how people buy and sell crypto for gains.
As a result, the broker exchange will not know an investor’s cost basis. What does this mean for you? If you’re a crypto investor, this means you will have to sort this out on your own. If you receive a 1099-B form, you might think you have a huge gain — and tax responsibility. This will likely not be the case, but you will need to keep detailed records of your cost basis (meaning your purchase and selling of crypto assets) to prove to your accountant and to the IRS how much of an actual gain you did have. Especially as these new rules gain their footing in the market, it is crucial to keep your own records to avoid unnecessary tax problems.
Tax Code Section 6050I: Brokers, Businesses to Report Receipt of More Than $10k in Crypto
Section 6050I requires that people who receive more than $10,000 in cash and cash equivalents file a report with the IRS. This can mean investments and gifts, for example. The report asks for details about how you were paid and by whom, and it requires names and Social Security numbers of all parties involved. This might sound trivial, especially if, let’s say, you were given money as a gift by a loved one, but failure to report these details is considered a felony offense.
The new bill requires similar provisions from businesses and crypto exchanges when they receive more than $10,000 in cryptocurrency.
This would apply not only to exchanges, but also to any business allowing crypto as a form of payment — possibly impacting your privacy.
For example, let’s say you purchased something with bitcoin valued at $10,200. The seller, acting as the business, would need to collect your information, including your Social Security number, to report it to the IRS. Non-profit CoinCenter has argued that this surveillance rule is “unworkable and arguably unconstitutional” CNBC reported.
Ultimately the Treasury Department will decide which of these provisions will actually go into effect. They are not slated to become active until January 2024.
More From GOBankingRates