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Latest Cryptocurrency Tax Moves in the U.S. Explained

4 mins
9 August 2021, 15:00 GMT+0000
Updated by Ryan Glenn
10 January 2023, 14:25 GMT+0000
In Brief
  • The Internal Revenue Service in the United States is again playing good and bad cop with Americans.
  • Over $28 billion is being sought by U.S. congressmen for crypto infrastructure funding.
  • In the U.S. all cryptocurrency assets are taxed like capital assets.
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The Internal Revenue Service in the United States is again playing good and bad cop with Americans. These ambiguous tax bills proposed by senators received mixed responses from the cryptocurrency community.

If they come into force, the two latest cryptocurrency tax bills can exempt some crypto categories from paying taxes. Still, the majority will become subject to new taxes.

Here is a breakdown of these latest cryptocurrency tax moves in the United States.

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Crypto infrastructure tax evasion amendment

Over $28 billion is being sought by U.S. congressmen for crypto infrastructure funding. This funding is to be provided by expanded taxation of decentralized market participants. This includes imposing new taxation requirements for those classified as crypto “brokers.”

The White House’s deputy press secretary Andrew Bates stated that “the Administration believes this provision will strengthen tax compliance in this emerging area of finance and ensure that high-income taxpayers are contributing what they owe under the law.”

The new bill will exclude proof of mining and sellers of hardware and software wallets. Still, the bill’s ambiguous wording implies that proof of stake validators will be eligible for taxation. Overall, it all depends on the definition of a broker when it comes to crypto taxation.

This is because the amendment implies that the definition of a broker is exclusive of any parties in the business of “validating distributed ledger transactions,” “developing digital assets or their corresponding protocols,” or operating mining software or hardware.

No tax for forked coins

Forks are everywhere, with all the new coins flooding the market. These pose some interesting questions taxation-wise. Recently, a Minnesota congressman introduced the Safe Harbor for Taxpayers with Forked Assets bill in the House of Representatives.

It seems to bear some favorable news for crypto users at large. At least in the sense of providing a reprieve or tax loophole to rely on in these difficult times. In their current iteration, the laws on crypto-assets imply that users who receive additional currency inflows due to a fork must declare such income.

These inflows are thus taxable during the fiscal year when the fork of the currency in question took place. If the bill is passed by the House of Representatives, it may be offering holders of forked assets a powerful incentive to migrate to nontaxable havens and turn even more attention to such coins.

The bill is rapidly gaining support in the crypto community. The Coin Center, a nonprofit crypto advocacy organization, and the Blockchain Association have both approved it. The Chamber of Digital Commerce also backs the bill. Even some Republicans, who are adamant opponents of cryptocurrencies, have pledged their support.

Current crypto taxation

Crypto taxes in the U.S. are currently based on a 2014 IRS ruling. This determined that all cryptocurrency assets are taxed like capital assets. This makes them closer to stocks or bonds, rather than fiat currencies, like dollars or euros.

This decision has considerable ramifications for crypto enthusiasts and holders. It makes them subject to complicated tax schemes and reporting requirements. Capital assets are taxed whenever they are sold at a profit. On the cryptocurrency side of the question, this illustration helps explain.

Whenever one purchases goods or services using their cryptocurrency assets, and the amount of the cryptocurrencies they spent has gained in value over the amount originally paid for it, their spending incurs capital gains taxes, which means an increase in value and revenue.

For a more tangible example, it is possible to envision that some crypto enthusiast bought $20 worth of bitcoin and held it as it rose in value to $200.

If the bitcoin were used to buy $200 worth of some products or services, the buyer would owe capital gains taxes on the $180 of profit gained over the period of time. The IRS does not care if the bitcoin was sold or spent. It cares about taxing capital gains.

More Scrutiny

Cryptocurrencies are not the only aspects of crypto that have come under increasing scrutiny in recent years. DAO’s, bearing a striking resemblance to a traditional limited liability company (LLC) or investment vehicle (i.e. private equity and hedge funds), are steady entering the crosshairs of US tax laws.

Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., proposed the Responsible Financial Innovation Act in June. The bill states that DAOs should undergo taxation as business entities. It also suggests that most DAOs must also incorporate in accordance with existing laws of an identifiable jurisdiction, such as a LLC or partnership.

The newly updated 1040 Form will also make the 2023 tax season unique. Taxpayers must now report any digital asset trading activity, a change from last year’s digital currency mandate. This change in language ensures that people understand that digital assets can consist of more than just a token.

The IRS’s decision to tax cryptocurrencies as capital assets are likely because of the perception that it is an asset rather than a viable currency. It would be fair to say that most view bitcoin as an investment. They are hoping for it to rise in value.

On the other hand, the IRS is all about finding sources of income for the state through taxes. Therefore, its decision to treat cryptos as investments is more pragmatic than dramatic.

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Frequently Asked Questions

What happens if you do not pay crypto taxes?

If you don’t pay your crypto taxes, you may be subject to fines and penalties from the IRS. The IRS has been cracking down on taxpayers who fail to report their crypto transactions, and they have a number of tools at their disposal to identify non-compliant taxpayers, including data matching with third-party exchanges and service providers. In addition to fines and penalties, failure to pay your crypto taxes could also result in criminal prosecution in some cases.

How is cryptocurrency taxed?

In general, the IRS treats cryptocurrency as property and investment, rather than currency. This means that all transactions, from selling coins to using cryptocurrency to make purchases, are taxed in the same way as other capital gains and losses. It is best practice to consult a tax preparer or CPA for further details.

What is a capital gains tax?

A capital gains tax is a tax that is levied on the profit or gain that is realized from the sale or exchange of a capital asset, such as real estate, stocks, or crypto assets. The amount of the capital gain is the difference between the selling price of the asset and the original purchase price, also known as the cost basis. In the United States, capital gains tax rates are generally lower than ordinary income tax rates, but they can vary depending on the length of time that the asset was held and the taxpayer’s tax bracket.

What is an ordinary income tax?

An ordinary income tax is a tax that is levied on an individual’s taxable income, which is typically based on their salary, wages, and other sources of income. Ordinary income tax rates are generally higher than capital gains tax rates, and they are applied to income that is not considered a capital gain or loss. In the United States, ordinary income tax rates are progressive, which means that taxpayers with higher levels of income are taxed at a higher rate.


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