The difficulty of implementing cryptocurrency taxation in the United States lies in the tax declaration rules.

The challenge of cryptocurrency taxation in the US is in the tax declaration rules.

Author | Jesse Hamilton

American cryptocurrency investors and their brokerage firms are waiting for a tax rule that will completely change the way they report cryptocurrency taxes. However, so far, the US government has not provided any clear answers to this issue – even though several prominent senators are calling on the Treasury Department to complete this work immediately.

In fact, the Internal Revenue Service (IRS), which is under the Treasury Department, completed this proposal several months ago to a degree sufficient for it to pass the formal internal review of the White House. However, this proposal has yet to move towards final public release. Industry insiders are currently speculating that the reason for the White House’s delay in the process of this proposal is because other cryptocurrency-related policies have now become the focus of attention in Washington.

Once implemented, this proposal will standardize how cryptocurrency companies report their clients’ tax information, similar to the summary income and loss forms (Form 1099) submitted by traditional brokerage firms. Therefore, potential concerns in the industry include: whether companies will be required to provide information they cannot obtain, or whether cryptocurrency companies unrelated to clients, such as mining companies, will be involved.

However, on the positive side, this proposal may eliminate one of the main objections to cryptocurrencies – that investors find it difficult to resolve their tax issues. Many industry insiders believe that when the final treatment of cryptocurrency taxes is roughly similar to other financial investments, it means that the US government has taken another step towards appropriate supervision. Although the proposal may be ready, Cody Carbone, head of policy at the Chamber of Digital Commerce, said that “resistance from the White House” could become a stumbling block to the implementation of the proposal. He said that it may be because of concerns that while debating legislation on the digital asset market and stablecoin regulation, this rule would legalize the cryptocurrency industry, as it is said that the White House National Economic Council actively participated in congressional negotiations last month. However, Carbone has also heard that the IRS may release proposed tax rules at any time. “We want it. Because we want to know what we need to report so that we can comply,” he said.

Legal Provisions

Implemented in 2021, the Infrastructure Investment and Jobs Act, which is related to this tax rule, also regulates reporting requirements to fully identify cryptocurrency traders with transactions valued at over $10,000. However, according to the requirements of this law, many complex issues need to be addressed, such as how companies should handle customers who manipulate funds using private wallets, and how brokers’ records should handle interactions on decentralized platforms. Therefore, implementing more comprehensive tax regulations in the cryptocurrency field has become an urgent task.

Whenever asked about the delay in this tax reporting rule, the Treasury Department tells CoinDesk, “The Treasury Department is working diligently to publish these important and complex regulations as soon as possible.” The White House has not responded to requests for comment.

Lawrence Zlatkin, head of the tax department at Coinbase Inc. (COIN), expressed his views on the delay, saying, “We shouldn’t be shrouded in uncertainty.” Coinbase Inc. is one of the most famous companies in the United States and will be guided by the new regulations in the future. “Since our customers should report cryptocurrency activities on their tax returns in any case, we should be transparent and provide them with information so that they can report correctly.” He also stated that Coinbase has established a series of infrastructure and has made the best possible preparations, hoping to help investors understand their taxes. This helps to tell customers what their investment gains and losses are, how to report the information, what is taxable and what is non-taxable, what they should ask their tax advisors, and ensure that they have at least some certainty about how to handle these things when they do them on Coinbase. Therefore, he said that the waiting during this period is “actually very frustrating because you can’t be fully prepared without knowing what these rules are.”

In December 2022, the IRS assured the industry that it can continue to act in accordance with the current laws and regulations until the new tax rules are finally determined. For this reason, the IRS also stated, “It will issue proposed rulemaking notices, list proposed regulatory texts, explain proposed rules, solicit public comments, and announce public hearings.” Only after completing all these work (including the unusual and time-consuming process of on-site hearings), the IRS can begin to analyze public feedback and write the final version.

Unlikely to be implemented in 2024

Proposing, collecting public opinions, and finally implementing a new tax rule usually takes several months, and it may even be extended to the next year, which will exceed the filing year of 2023, although it should have been implemented this year to prepare for the filing of 2024.

Miles Fuller said, “If you read it, you can find that its goal is that all these places need to collect data in this tax year so that they can generate these forms and distribute them.” Fuller, who served as a lawyer for the IRS for a long time and joined TaxBit, a tax software company focusing on cryptocurrency, after leaving the IRS last year. He said that if they want to complete these tasks before the 2024 filing year, time will be tight. He finds it “very strange” that the proposal has passed the final pre-release step but is still locked in the Treasury Department. He said that it is unrealistic for these rules to take effect before January 1, 2024, because this is not only a problem of industry adaptation and compliance, but also a system problem for the IRS to absorb and analyze a large amount of new data.

Some US lawmakers are not ready to accept the tax rules being postponed to the next tax year. US Senator Elizabeth Warren (Democratic Party-Massachusetts) said, “If you don’t take action quickly, your agency may not be able to implement the final rules within the deadlines set by Congress. Elizabeth Warren, Bernie Sanders, and others wrote to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel last week.” We suggest that you take prompt action to implement strong tax rules for cryptocurrency brokers.”

This letter states that implementing these rules can prevent tax evasion, netting the US government billions of dollars in taxes, and allow the IRS to identify and pursue the most serious tax evaders. Because as long as there is an opportunity, tax evaders and cryptocurrency intermediaries willing to help them will continue to exploit this system, finding loopholes and siphoning off billions of dollars from the US government’s pockets each year. As for the industry’s concerns that “the proposal may have too broad a definition of ‘brokers’ who must comply with these regulations,” the Treasury Department assured lawmakers in a letter early last year that companies such as cryptocurrency miners, who typically do not have access to customer information, would not be included.

Currently, the IRS has not publicly stated that it will implement this tax rule in 2024. Capen said, “The IRS has always told us that they will not delay. Therefore, accountants and tax service providers in the industry are currently planning as if these broker reporting rules will be implemented according to the passed regulations.”