New Crypto Tax Law: Good For Some, Bad For Others
The bipartisan infrastructure bill passed by the U.S. Senate last week included something that upset many cryptocurrency diehards: a provision that compels cryptocurrency brokers to report transactions, which Congress claims will raise up to $28 billion over a decade.
The provision would require cryptocurrency brokers to report all transfers of digital assets, 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 companies.
The idea here is to improve enforcement of existing cryptocurrency tax law. The IRS already requires crypto investors to pay a tax on earnings they make from investment gains (similar to the capital gains tax), but enforcement of this provision has been shoddy. By compelling brokers to report data, the IRS wants to plug the crypto “tax gap.”
Naturally, not everyone will be happy with this new law. Yet there will also be winners.
Longtime crypto investors who believe in the founding principles of cryptocurrency, such as anonymity and freedom from oversight, are especially mad about the new provision. Many of these investors were drawn to cryptocurrency precisely because it provided an alternative to government-issued money -- and more broadly, a way to get around pesky government rules and fees. Not coincidentally, many of these investors bought cryptocurrency years ago, meaning their gains have been astronomical. As a result, any taxes they owe on sales will also be large.
Decentralized exchanges will also be concerned by the new provision, because it may pose a fundamental threat to their business model. Unlike regular crypto brokers, which serve as a middleman between buyers and sellers, decentralized exchanges are not built for tracking and reporting network transactions. Instead, they rely on a mixture of cryptography and complex mathematics to perform all the functions of a traditional exchange; the appeal of these exchanges is precisely in the fact there is no powerful group of executives with access to the information the IRS is now demanding. Unless decentralized exchanges become more centralized, they risk being non-compliant with the new law.
The crypto tax provision imposes a new burden on traditional crypto brokers such as Coinbase (COIN) and Gemini, but these exchanges may actually welcome the new reporting requirements. That’s because the crypto sector still exists in a place of regulatory uncertainty; many crypto pioneers fear any new laws and rulings that may threaten their bottom line. Those worries have been exacerbated under the Biden administration, which has taken a tougher rhetorical stance towards crypto. If this new provision is passed into law, brokers like Coinbase will have more clarity on what’s expected of them from U.S. tax authorities. That bodes well for their long-term role within the financial firmament.
Another group that will take joy from this new law? Crypto investors who care more about making money than they do about financial freedom and other Bitcoin buzzwords. That’s because a new U.S. taxing regime contributes to the increasing normalization and acceptance of cryptocurrency within mainstream society. Some retail and institutional investors have continued to sit on the sidelines of cryptocurrency, due to lingering uncertainty over the novelty and legality of the cryptocurrency sector. If this new provision ushers more of that capital towards digital assets, prices will go up, and crypto investors will be happy.
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