The nature of innovation means that laws will always be lagging behind new technology, now, legislation is attempting to catch up to cryptocurrency.
Approximately 17% of US adults have used digital currency, which positions itself as a decentralized method of payment. But as marketplaces have grown, they have quickly created a landscape that makes it easy for users to avoid paying taxes owed to the government.
A new tax form proposed by the Treasury Department in August, called Form 1099-DA, would make it easier for the government to determine which taxpayers owe money from crypto transactions, it would also help give crypto users a more straightforward way to determine what they owe. The proposed changes are an attempt to enforce legislation adopted by Congress in 2021 with the passage of the Infrastructure Investment and Jobs Act.
How Paying Taxes on Cryptocurrency is Changing
Currently, paying taxes on crypto transactions largely relies on the honor system. Because these platforms were designed without the intention of operating like traditional financial institutions, there is little in place to facilitate the enforcement of tax law. And even when users do pay taxes, without a formal report, it is often difficult to accurately determine what they owe.
The proposed Form 1099-DA would require that brokers annually report the sales and exchanges of digital assets by their users to both the IRS and the taxpayer. This would bring reporting for cryptocurrency more in line with requirements for traditional brokers.
Who will Be Affected?
The new rules are intended to bring enforcement to a still rapidly growing industry and will affect cryptocurrencies such as Bitcoin, Litecoin and more, as well as non-fungible tokens (NFTs). The proposal defines “brokers” as either centralized or decentralized digital trading platforms, crypto payment processors, and online applications for storing digital assets.
The challenge will come in compliance and enforcement. Even if crypto brokers fully cooperate, these platforms lack the infrastructure that stricter reporting requires. In addition to systemic upgrade, transparency will also need to be increased, as currently some platforms only require that traders disclose a username, making it impossible to know who they are offline.
What is Next for Crypto Users?
It is clear that the government is coming with stricter rules for the cryptocurrency market. The IRS will be accepting feedback on the proposal until October 30th, and if fully implemented, the reporting will begin in the 2025 tax year.
While details are still developing, one thing is certain, with stronger rules and enforcement comes stiffer penalties. Cryptocurrency users should prepare now to ensure they remain in compliance with new regulations. If you have any questions about tax implications or any other concerns regarding digital currency transactions, please reach out to your advisors at FIRM.