Industry advocates have welcomed the finalization of cryptocurrency tax legislation after years of wrangling, but messy deliberations over non-custodial providers remain to be addressed.
It took a long time, but the IRS and the Treasury Department finally New cryptocurrency tax reporting rules for investors have been agreed upon.
At first, these new guidelines may seem scary for exchanges and customers alike.
But given long-standing complaints about a lack of transparency in the sector, the policy, which attracted 44,000 comments during the consultation process, has been met with robust reception.
You may be wondering why. Because the rules of the road are now clearer to follow, and it's a win-win for everyone involved.
Trading platforms will now be required to report customer profits and losses, with the measures being phased in over the next three years.
The hope is that this will allow taxpayers, who have long been responsible for reporting gains from cryptocurrency investments, to file accurate returns with less hassle.
On the other hand, the bill could also bring huge revenue to the IRS, with some estimates saying it could increase tax revenue by $28 billion over 10 years.
Are there people who lost money? Yes… those who didn't declare profits over the past few years, mistakenly believing that cryptocurrency transactions couldn't be tracked.
The IRS said it aimed to “close tax gaps related to digital assets” while ensuring that the strengthened rules could actually be implemented by the cryptocurrency industry.
“These regulations are an important part of a larger effort on tax compliance for high-income individuals. We need to ensure that digital assets are not used to hide taxable income. These final regulations will also improve detection of non-compliance in high-risk areas for digital assets.”
IRS Commissioner Danny Wuerfel
The regulator made it clear that more needs to be done in this regard. One glaring omission in the new guidelines is decentralized brokers, i.e. platforms that do not hold coins on behalf of users.
The IRS and Treasury Department acknowledged that they “need more time to consider the nuances” of such transactions, but most taxpayers use centralized brokers anyway.
“Game changer”
In a statement to crypto.news, Erin Fenimore, vice president of tax at TaxBit, said the newly signed regulations “mark an important step forward for digital assets in the United States.”
She argued that these regulations would “bring much-needed transparency and legitimacy to rapidly growing financial markets”, adding:
“[This] “This is a game-changer for the industry. This new regulatory certainty will enable corporations and traditional financial institutions to navigate the digital asset space with confidence.”
Erin Fenimore
She further argues that the digital asset could become a “more accessible investment option” for individuals and businesses, riding on the momentum of exchange-traded funds based on Bitcoin’s spot price, with rumors that Ether may follow suit soon.
“These updates provide firms, particularly custodial exchanges, with the guidance they need to ensure proper compliance and further strengthen the position of cryptocurrencies within the broader financial ecosystem.”
Erin Fenimore
She further called on companies in the crypto industry to “streamline their internal compliance” to avoid duplicative reporting and reduce the likelihood of their clients being sued by the tax office.
A messy fight
CoinCenter also welcomed the final reporting rules, but argued that a significant amount of time has been wasted to get to this stage.
At issue in particular is the definition of who constitutes a “broker” in the crypto industry, with nonprofit groups arguing for over six years that the definition should only apply to centralized exchanges like Coinbase and Kraken.
That finally happened, but the IRS and Treasury Department may have lost a lot of tax revenue in their dispute with Congress.
“By now we should have a verifiable record of five years of taxpayer profits from centralized exchanges. But we don't have that.”
Coin Center
The group further ordered that if the definition of a broker remains “vague and unreasonable,” everyone from miners and validators to software developers will find themselves in the position of having to monitor other crypto users and report their personal transactions, or face criminal penalties. This could be unconstitutional, it warned, adding:
“If adopted, the definition of a broker would have made the United States less competitive in the field of open blockchain technology.”
Coin Center
Unfortunately, the question of what should happen to non-custodial entities remains unanswered, and confusion is likely to ensue.
