The Biden Administration is looking to crack down on tax evasion, and pointing to cryptocurrency as a big area of concern.
The U.S. Treasury last week announced proposed changes to cryptocurrency reporting as part of President Joe Biden’s proposed American Families Plan. The plan would implement a new rule for businesses and crypto exchanges, requiring them to report any cryptocurrency transactions with a fair market value of $10,000 or more to the IRS.
That’s the same amount currently required for cash deposits. If you deposit more than $10,000 into your checking account, for example, your bank is required to report that to the federal government.
The report says cryptocurrency “poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”
What It Means
The Treasury’s proposal is a small step toward the type of governmental regulation that could help clarify questions around investment value and potential uses of cryptocurrency in our broader economy.
“Better regulation will benefit crypto investors, further the development of new technologies, curtail the use of crypto-assets used for illicit payments, and reduce the risk of cyber attacks, which can result in collateral damage elsewhere in our financial system,” according to a 2019 report on crypto regulation from Brookings Economic Studies.
The latest move toward regulation from the Treasury is unlikely to be the last, according to some experts.
“I expect more enforcement action, despite what happens with this specific proposal,” says Andrew Gordon, CPA, a tax attorney and president of Gordon Law Group.
What You Should Do
Whether or not this specific proposal passes, it underscores the importance for anyone with holdings in digital currencies to keep accurate, up-to-date records of any crypto transactions or transfers. Today, the IRS taxes crypto as property, meaning your sales and trades are subject to taxes on the capital gains or losses incurred.
“Now more than ever, we’re seeing an uptick in IRS enforcement. So it’s good to have records and understand where everything came from.”
If you own cryptocurrency, keeping track of the following throughout the year will make it easier to report your cryptocurrency at tax time, and understand how other potential regulatory actions might affect you:
- Know your cost basis (the money you’ve put into cryptocurrency, regardless of increase or decrease in value)
- The date you acquired any crypto
- Where your crypto is held
- Any transactions or transfers you make in and out of crypto exchanges or wallets
Ultimately, it’s up to you to track all your crypto moves and taxable events throughout the year. You shouldn’t count on year-end tax documents from crypto exchanges, especially if you hold crypto in more than one place. When tax season does roll around, you may also consider working with a tax professional experienced with crypto or using a cryptocurrency-focused tax software to ensure you’re reporting as accurately as possible.
The IRS first issued guidance around crypto reporting in 2014. Its guidance doesn’t cover all topics related to crypto reporting, especially for activity that goes beyond simply buying and selling digital currencies. But there’s reason to believe regulatory powers have a growing interest in crypto, for individual investors and businesses.
“Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade,” the Treasury report notes.
U.S. Treasury Secretary Janet Yellen recently said there’s not yet an “adequate framework” for tackling cryptocurrency regulation in the United States — though she believes it’s a topic worth addressing — in response to a question about regulating crypto at the Wall Street Journal’s CEO Council Summit.
As recently as 2020, the IRS added a cryptocurrency question to Form 1040 for taxpayers to report capital gains and losses on crypto transactions. That addition alone speaks to how important an issue this is for the government, Gordon says. “I think we’re just going to continue to see more enforcement, but hopefully along the way some more clarity as well.”