Important New Tax Changes on the Horizon for Cryptocurrency Investors

Two bills currently pending in Congress could result in important changes for cryptocurrency investors. One bill, the Senate infrastructure bill, proposes enhanced reporting requirements that would make it easier for the IRS to enforce cryptocurrency investors’ income tax obligations. The other, a bill pending in the House, would prevent cryptocurrency investors from claiming certain losses. According to Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, cryptocurrency investors should monitor both legislative efforts, and they should take proactive steps to ensure federal tax law compliance going forward.

Senate Infrastructure Bill Would Require “Brokers” to Report Cryptocurrency Transactions

While the Senate infrastructure bill proposes several sweeping changes, the most notable proposal for cryptocurrency investors is a new requirement for “brokers” to report sales similar to the way that stockbrokers must report their customers’ securities transactions. As has been widely reported, the bill’s definition of a “broker” is extremely broad—encompassing even software developers and cryptocurrency miners that would not have access to their customers’ data. Yet, the proposal appears to be moving forward, and it will ultimately be up to the U.S. Treasury Department to determine how to implement the new law once it is enacted.

Cryptocurrency investors should already be reporting their taxable transactions to the IRS. If the Senate infrastructure bill passes in its current form (which appears likely), the IRS will gain access to investors’ transaction data without the need to rely on “John Doe” summonses and other investigative tools. This means that enforcement will increase significantly—and it is estimated that over the next decade the bill will generate $28 billion in additional cryptocurrency-related tax revenue.

House Bill Proposes “Wash Sale” Rule for Cryptocurrency Transactions

Separately, the House of Representatives has introduced a bill that would establish a “wash sale” rule for cryptocurrency transactions. A similar rule already exists for transactions involving the sale and repurchase of securities. If enacted, the bill would prohibit cryptocurrency investors from selling assets, taking a loss, and then repurchasing the same assets during a down market.

Currently, “wash sale” transactions involving cryptocurrency are not illegal, and the House bill proposes an effective date of January 1, 2022. Similar to the Senate infrastructure bills, the House bill appears likely to pass, and Congress’s Joint Committee on Taxation estimates that the bill will generate $16.8 billion in tax revenue over the next decade.

Cryptocurrency tax compliance has become a top enforcement priority for the IRS in recent years. If enacted, these new proposals will bolster the IRS’s enforcement efforts, and they will significantly increase the compliance risks for cryptocurrency investors.

Request a Consultation with Virginia Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

If you have questions or concerns about cryptocurrency tax compliance, we strongly encourage you to schedule an appointment to learn more. To request a consultation with Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, 703-752-3752, email ket@thornlawgroup.com or contact us confidentially online today.