Editor's Note: This story originally appeared on SmartAsset.com.
Crypto investors better look up from their Coinbase and Gemini apps. Changes are afoot.
President Joe Biden signed into law a $1.2 trillion infrastructure spending package on Nov. 15, and though the law was a key achievement as it pertained to infrastructure spending, there were a number of other politically relevant provisions — namely regarding measures that affect how individuals and businesses will need to report cryptocurrency holdings and gains, mainly for tax purposes.
While the stated changes won’t actually go into effect until January 2024, brokers and their customers will need to report cryptocurrency gains on a new 1099-B form. Additionally, those who receive more than $10,000 in cryptocurrency will now need to file the transaction with the IRS under an expanded part of section 6050I of the tax code.
While these changes are still far off and won’t affect everyone, it’s important to be prepared for what you might need to do differently. If you’re looking for help managing your cryptocurrency portfolio, a financial adviser may be able to help.
There are two main provisions listed in the infrastructure law that relate to cryptocurrency. As cryptocurrencies have become more and more of a dominating force in the economy, it’s clear that the government wants to make sure people are playing by the rules.
However, the new provisions are not extreme, and it’s important to remember that these changes won’t go into effect immediately. Plus, the U.S. Treasury plans to evaluate the implications of these rule changes before putting them into full effect.
Cryptocurrency 1099-B Forms
The first is that all brokers who deal with cryptocurrency will now have to fill out 1099-B forms that detail their cryptocurrency gains and losses each year. Brokers will need to send a 1099-B to both the IRS and their customers, and customers will need to report their gains and losses as well.
It’s important to note that this is what anyone with any type of brokerage account has had to do for years. The main difference is that the information will now come through any cryptocurrency brokers that an individual uses as well, so investors with multiple wallets may end up with overstated gains.
Skeptics are also worried that the term “broker” is too broad and may end up implicating organizations that don’t have the resources to keep track of the type of information requested.
For some more context, someone trading cryptocurrency on multiple platforms is currently required to file a 1099-B themselves to report on their cryptocurrency gains and losses. However, if cryptocurrency brokerages begin sending out 1099-Bs themselves, some may end up with overstated gains.
This is due to the fact that cost basis information isn’t readily available in the same way that it is when buying and selling traditional assets like stocks and funds.
Someone who buys $100,000 of Bitcoin on one exchange and then sells it for $300,000 on a different exchange may end up with a larger 1099-B tax obligation than they truly owe.
U.S. Tax Code Section 6050I Expansion
The second provision relates more to privacy and security than it does to taxes. Currently, section 6050I of the U.S. tax code requires anyone who receives more than $10,000 in cash and equivalents to file a report with the IRS.
Under the new provision, this rule will apply to those who receive more than $10,000 in cryptocurrency as well.
Section 6050I requires individuals to report names and Social Security numbers of those who gave them the assets.
While tax obligations won’t change for those following tax laws, some cryptocurrency advocates have privacy concerns over the expanded rule. It’s unclear why exactly skeptics think cryptocurrency should be exempt from section 6050I, but it’s worth noting that it results in some extra paperwork for those receiving larger cryptocurrency sums.
How Should You React to These New Provisions?
First of all, it’s important to note that these provisions aren’t slated to go into effect until January 2024. That’s over two years from now, and they’re not even guaranteed to go into effect as currently stated.
The U.S. Treasury has made it clear that they plan on taking time to evaluate the specifics of the new rules and provisions. If they decide that certain groups should be exempt, we may end up seeing very different versions of the proposed changes.
While you won’t need to do much planning when it comes to the section 6050I expansion, it’s worth thinking about how you can prepare for a change in 1099-B reporting.
If you’re worried about the potential changes, do your best to trade your cryptocurrency on a single brokerage platform. At the very least, make sure to tally and report your cost basis when transferring a cryptocurrency asset between brokerages.
As noted, it’s important to remember that the proposed changes aren’t slated to go into effect until January 2024. Perhaps more relevant is the fact that the proposed changes are subject to a rigorous review process by the U.S. Treasury and are likely to be significantly amended before they go into effect.
The government seems to be using these provisions largely to establish general intent around how it sees fit to regulate cryptocurrencies.
All that said, if you’re nervous about potential changes, it’s a good idea to make sure you’re keeping close track of your cryptocurrency assets and how they move around your portfolio.
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