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Crypto tax-reporting changes may lead to IRS crackdown

The bipartisan infrastructure bill includes requirements for brokers to report their customers’ cryptocurrency gains to the Internal Revenue Service, but exactly what constitutes a broker is stirring controversy.

As one of the ways to help pay for an estimated $28 billion of the $1.2 trillion in infrastructure spending, congressional negotiators included a provision requiring information reporting on the names, addresses and gross proceeds of cryptocurrency transactions by brokers. The crypto industry tried to lobby Congress to narrow the provision so it wouldn’t also apply to technology companies involved in the crypto industry, as well as cryptocurrency “miners” who use their computer power to solve complex mathematical problems to process the currency, but they were unable to win changes in the version of the bill passed last month by the Senate (see story).

The House is not expected to vote on the legislation until later this month, but at this point the language seems to be finalized. If the infrastructure bill ultimately passes, which is uncertain since it is tied to the larger $3.5 trillion spending and budget package from the Biden administration that Republicans uniformly oppose, the crypto industry is expected to lobby the Treasury Department to narrow the definition of “broker” in the tax regulations that would ultimately need to be written.

“The IRS has been pounding the table to Congress that there has been a severe deficiency in tax compliance when it comes to crypto exchanges, and the reason being that there’s no current statutory requirement for crypto exchanges and other income-generating platforms to issue year-end reports of taxable gains to both the investor and the IRS, similar to existing brokerages for equity trades,” said Tom Cardinale, a partner in EisnerAmper’s corporate tax group for blockchain and cryptocurrency services. “This lack of reporting leaves a tendency for crypto investors to think they don’t have to report the gains if the IRS does not know about them. The infrastructure bill, which is still in process, is looking to correct this by modifying the term ‘broker’ to include certain crypto-facilitating companies and exchanges.”

The IRS has long sought such information, filing so-called John Doe summonses against cryptocurrency exchanges in an effort to uncover tax evasion by their customers. By requiring companies to provide the information on a regular basis to the IRS, the agency wouldn’t need to go through the courts to compel companies to produce it.

“In the meantime, while Congress is fighting over the language of that bill, the IRS has been carrying out their own objectives, going after exchanges through court rulings, trying to get information, starting with Coinbase a few years ago and now they’ve recently gone after Kraken and Poloniex,” said Cardinale. “They’ve been getting names, trades and activity of investors on those platforms. But it would be a lot easier if crypto exchanges were just given the same reporting obligations as regular investment brokerages, that is, at year end, to report a detailed 1099-B equivalent to investors that shows all of the gains and losses, which the IRS gets a copy of, and that has always born more compliance by investors in any capacity. But, right now in the crypto community, there currently is no statutory requirement.”

There is little chance of the language changing when the House takes up the bill because of the tenuous bipartisan deal that negotiators struck in the Senate. “The infrastructure bill was amended in the Senate with a bipartisan majority,” said Rochelle Hodes, a principal in the Washington National Tax Office at Crowe LLP. “It didn’t go through the special rules of reconciliation where the Democrats could enact a bill alone with only 50 votes. The coalition of all the parties agreed, and it’s a very delicate balance. There were amendments offered in the Senate to the cryptocurrency provision to narrow the definition of a crypto broker at the end of the day, in the most general terms, to exclude miners and software providers. Those amendments did not get passed. Now it’s over in the House and the budget resolution has language saying that this bill will be brought to the floor for a vote in the House on September 27. There’s an opportunity for folks to try to get changes to this bill in the House, but the thing is if the bill is changed, it has to go back to the Senate, and will there still be 60 votes there to do another vote? The Democratic leadership in the House has to consider how they’ll handle this. I think changes to the infrastructure bill in the House would be an uphill battle because of the fact that there’s already agreement. The Senate has already…

Read More: Crypto tax-reporting changes may lead to IRS crackdown

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