Crypto tax provision may prompt investors to push industry for more compliance help

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The debate in Congress on new tax compliance measures for cryptocurrency investors has mainly focused on two questions: the potential to generate new income and what parts of the industry can be reclassified as brokers who need to transmit data on client gains and losses to the IRS. But the bipartisan infrastructure bill seeks to do more than simply expand the definition of a broker in the crypto space.

It would also require brokers to alert the IRS when clients transfer their crypto assets to an account where no broker keeps tabs on trades and purchases made by an investor. So, even if the definition of a broker remains quite narrow, crypto users may end up pushing the industry to increase its support for tax compliance.

For the more well-known cryptocurrency exchanges, it makes sense to collect and submit a 1099 form for their clients. Many people buy and sell their pieces through these platforms, triggering an achievement event. Stock exchanges can report capital gains or losses relatively easily, and many already report information to the IRS.

But what happens when people withdraw their cryptocurrencies from these exchanges and move them to a personal or non-custodial cryptocurrency wallet? There are still tax implications for purchases and peer transactions from these wallets, but it is less clear who can or should report them.

To cover this gray area, some lawmakers want other parts of the cryptocurrency blockchain ecosystem, besides the exchanges, to be responsible for providing the IRS with relevant information about transactions and exchanges. This has led industry advocates to worry that some players in this field may be required to provide IRS clients with information they do not have. But the IRS may not need a broader definition of broker to solve much of the compliance problem.

In the September 2 episode of the TPC The Prescription webcast, tax lawyer and former Treasury employee Lisa Zarlenga said the Senate bill would also require exchanges to notify the IRS when clients transfer assets from their platform to an account without brokerage. Those concerned about tax evasion or tax evasion in the crypto space should rest for a bit knowing that the IRS would receive the names and other account information of cryptocurrency traders who move their assets to a non-custodial portfolio.

This is not a perfect solution for the IRS, but it may not be necessary. Despite some stereotypes, it turns out that crypto investors are a lot like other investors.

A recent study published by the research group CESifo Networka based in Munich, Germany, used data from the U.S. Consumer Payments Choice Survey to better understand whether cryptocurrency investors differ from those who invest. stick to more traditional assets. They found that investors in the cryptocurrency space showed no inclination to distrust fiat currencies or traditional banking and financial services.

From a policy perspective, one of the main lessons to be learned is that, as investors’ goals are the same as those of other asset classes, regulation should be the same, according to the report.

That’s not to say that lawmakers and the Treasury should ignore industry concerns about regulations inconsistent with current technology. But it does suggest that cryptocurrency investors want to stay in compliance with tax laws and can expect the cryptocurrency industry to provide more services that make tax compliance easier. For example, asking stock exchanges to report these transactions could be helpful at tax time, just as the reporting of stock transactions by stock brokers / dealers makes tax reporting easier and less time consuming.

If the proposed client reporting rule becomes law, demand for compliance assistance from the industry will only increase, and the disorderly debate over the actual definition of a broker may not be what makes it happen. actually move the needle.

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