The Internal Revenue Service (IRS) and the U.S. Department of the Treasury (USDT) have proposed new tax reporting regulations for digital assets. With these rules on the verge of implementation, many investors are already preparing.
According to the USDT, the primary intention of these proposed regulations is to “close the tax gap,” allowing everyone to follow the same rules and reduce tax evasion. Here’s how cryptocurrency traders can make the necessary preparations.
New Proposed Regulations for Cryptocurrency Tax Reporting
The new regulations are partly due to the 2021 $1 trillion Infrastructure Investment and Job Act — which included rules on increasing tax reporting for digital asset brokers. The bill stated the IRS should define these brokers.
They should also provide new tax reporting documents with instructions. The IRS and USDT released the new proposed regulations on Aug. 25, 2023. The rules are open for public feedback until Oct. 30, and public hearings have also been scheduled for Nov. 7 and 8.
The regulations introduce a new tax document for digital assets called Form 1099-DA. The idea is to make it easier for individuals to calculate whether they owe taxes on their crypto.
According to the USDT, it will make the process easier and reduce the need for taxpayers to make complex calculations or seek the help of third parties to submit returns. This form is similar to other tax documents and requires cryptocurrency brokers to provide it to investors.
Under the proposed regulations, a broker is defined as a digital asset trading platform, cryptocurrency payment processor and some digital wallets. This includes decentralized and centralized crypto trading applications. Under these new proposed laws, digital asset brokers will follow the same tax reporting rules as other financial agencies.
If the new regulations are implemented, brokers must submit tax reports for 2025 in January 2026. While not everyone is sold on the proposed rules, it can come as a necessary change and simply the life of many cryptocurrency investors.
However, some experts recommend that individuals should not only rely on the 1099-DA Form but also perform their own due diligence. With the chance of these new regulations becoming a reality, many investors are starting to make the necessary preparations.
How Can Cryptocurrency Traders Prepare for the New Regulations?
According to the nonpartisan Joint Committee on Taxation (JCT), these new rules can raise almost $28 billion in 10 years. The regulation of cryptocurrency brokers reporting additional tax information was set to begin in 2024.
However, the IRS delayed it and released a news report stating digital asset investors should still announce their crypto activity. That said, people are already preparing for the new regulations.
One of the best things investors can do to prepare is ensure they have disclosed all previous crypto transactions. It is better to report it than have the IRS find out on its own. This could result in less severe penalties.
It is better to be safe than sorry, so investors should consider going through past transactions. This will help them determine whether there are any unreported income instances.
Digital asset users can employ methods to reduce the tax they owe. Capital gains tax is typically lower than income tax, and investors could pay 15% less if they hold onto their crypto for longer.
In many cases, new regulations result in a rise in crypto tax evasion investigations. During fiscal year 2021, the IRS seized $1.2 billion of cryptocurrency.
Another thing investors can do is keep track of all past crypto activity. While the new 1099-DA Form can help digital asset users determine whether they owe tax, human error can still occur. This is why cryptocurrency investors should do their due diligence and not only rely on the new document.
One aspect that can make this process easier is if users store all their digital assets on one crypto exchange platform. Investors making the necessary preparations can ensure they don’t run into headaches when these new regulations become a reality.
What Is the General Consensus About the New Regulations?
The cryptocurrency industry has had mixed reactions to the new regulations. The Blockchain Association has posted a press release on its website where CEO Kristin Smith explains what she thinks of the new tax reporting rules.
She said implementing these regulations correctly could help make it easier for crypto investors to obtain the necessary information to complete their tax returns. She also stated that the Blockchain Association is excited to provide feedback to help these regulations become a workable final product.
In early August, Elizabeth Warren, Bernie Sanders and many other U.S. senators sent a letter to the IRS and USDT. It urged them to implement rules stopping digital asset tax evaders. They claim strong regulations are necessary or people will continue to abuse the system.
Some believe these new rules will have little effect on tax compliance. The regulations are open to public feedback until Oct. 30, so people can still express their concerns.
Preparing for the New Crypto Tax Reporting Regulations
While these rules are still a little while away from becoming the new norm, investors should consider making the necessary preparations. The best way to do this is to announce previous unreported crypto income, record past transactions and keep digital assets in a single exchange.
While there is a difference in opinions about the new regulations, it could make it easier to comply with crypto tax laws.
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