New crypto tax law: good for some, bad for others

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The bipartisan infrastructure bill passed by the U.S. Senate last week included something that upset many cryptocurrency enthusiasts: a provision that requires cryptocurrency brokers to report transactions, which it claims Congress, will raise up to $ 28 billion over a decade.

The provision would require cryptocurrency brokers to report all digital asset transfers, just as traditional brokers must report all sales of stocks, bonds, commodities and other assets. Simply put, the IRS wants crypto firms to behave more like regulated financial firms.

The idea here is to improve the enforcement of the existing tax law on cryptocurrencies. The IRS already requires crypto investors to pay tax on the income they earn from investment gains (similar to capital gains tax), but enforcement of this provision has been poor . By forcing brokers to report data, the IRS wants to close the crypto tax gap.

Of course, not everyone will be happy with this new law. But there will also be winners.

Long-time crypto investors who believe in cryptocurrency’s founding principles, such as anonymity and freedom of surveillance, are particularly fond of the new provision. Many of these investors were drawn to cryptocurrency precisely because it offered an alternative to government-issued money – and more broadly, a way around pesky government rules and fees. It’s no coincidence that many of these investors bought cryptocurrencies years ago, which means their earnings have been astronomical. As a result, the taxes they owe on sales will also be significant.

Decentralized exchanges will also be affected by the new arrangement, as it may pose a fundamental threat to their economic model. Unlike regular crypto brokers, which act as an intermediary between buyers and sellers, decentralized exchanges are not designed to track and report network transactions. Instead, they rely on a mixture of cryptography and complex mathematics to perform all of the functions of a traditional exchange; the appeal of these exchanges lies precisely in the fact that there is no powerful group of executives with access to the information the IRS is asking for now. Unless decentralized exchanges become more centralized, they may not comply with the new law.

The crypto tax provision places a new burden on traditional crypto brokers like Coinbase (COIN) and Gemini, but these exchanges may in fact welcome the new reporting requirements. This is because the crypto industry still exists in a place of regulatory uncertainty; many crypto pioneers fear any new laws and decisions that could threaten their bottom line. These concerns were exacerbated under the Biden administration, which took a harsher rhetorical stance on crypto. If this new provision is enacted, brokers like Coinbase will have more clarity on what is expected of them from the US tax authorities. This bodes well for their long-term role in the financial firmament.

Another group that will be happy about this new law? Crypto investors who care more about making money than financial freedom and other Bitcoin buzzwords. This is because a new U.S. tax regime is contributing to the increasing normalization and acceptance of cryptocurrency within mainstream society. Some retail and institutional investors have continued to stay on the fringes of cryptocurrency, due to lingering uncertainty about the novelty and legality of the cryptocurrency industry. If this new arrangement devotes more of that capital to digital assets, prices will rise and crypto investors will be thrilled.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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