The Crypto Tax Awareness Gap

Hardly any crypto investor is aware of all the situations in which their token trading activities are subject to tax, a poll conducted by Wakefield Research for tax preparation assistance firm CoinTracker, he says.

While the Internal Revenue Service issued specific guidance in 2014, and updated Once again in 2019, the rapid emergence of new crypto products and services has left the US government a few steps behind. But a large number of crypto investors are not even aware of the existing guidelines.

Ignorance of crypto taxes is widespread, and that is a problem for both taxpayers and the government. In the survey, when presented with a number of possible situations in which cryptocurrencies could be taxed, 97% of respondents incorrectly answered at least one.

• In fact, there are seven types of taxable cryptocurrency transactions: exchanging cryptocurrency for fiat currency, spending cryptocurrency, exchanging one type of cryptocurrency for another, earning interest, receiving staking rewards, generating mining income, and receiving airdrops.

• One of the biggest issues uncovered by the survey was that most cryptocurrency investors were unaware that exchanging one type of cryptocurrency for another is a taxable event, likely because they have not experienced similar transactions in the non-crypto world.
• “It’s very rare that a US taxpayer has ever faced a scenario where they trade one stock directly for another, like no one trades Facebook stock directly for Google stock,” CoinTracker co-founder, Chandan Lodha.
• Another factor: taxes become exponentially more complex when a user transacts crypto across multiple exchanges, which is common. The higher the number of exchanges, the more difficult it is to keep track of taxes across the board.
• It doesn’t help that cryptocurrency exchanges don’t typically provide tax forms showing annual capital gains and losses, largely for the above reason. But starting in fiscal year 2023, they will have to figure it out.

People think they know what to expect, but most likely they don’t. Despite the obvious gaps the survey revealed, 54% of respondents felt confident in their knowledge of crypto taxes.

• So while some cryptocurrency investors think they are tax-compliant and think they know how to file, emerging use cases can present roadblocks.
• “The data suggests that it is not because users are trying to evade taxes or dodge taxes using cryptocurrencies,” Lodha said, as 74% of respondents said they wanted more information on how crypto exchange taxes work. that they use
• Instead, it is more about the inherent complexity of crypto and some key differences from the savings and investment scenarios most taxpayers are familiar with. your bank they could have given your grandparents a toaster, but airdropped tokens are not covered by the regulations governing that kind of marketing gimmick.

Washington has a crypto tax agenda. As part of Biden’s 2021 infrastructure bill, IRS Crypto Reporting Requirements in 2023 it will be easier for crypto investors and harder for crypto businesses.

• Under the new requirements, cryptocurrency exchanges, custodians, and other services must follow existing broker information reporting rules, which means they must issue Form 1099-B annually, detailing all transactions made.
• Biden is also looking at crypto taxes as a way to close the budget gap in his new budget proposal, meaning there could be clearer rules in the future as the budget “seeks to modernize the rules for reporting digital assets.” . according Ernst and Young.
• Some members of Congress have also drafted more crypto-friendly tax bills, such as the Virtual Currency Tax Fairness Act, which would exempt small transactions from being taxed. The tax equity proposal has already garnered bipartisan support.

As cryptocurrencies are growing, tax advice and crypto compliance are also growth fields. As a relatively new sector, cryptocurrencies are likely to encounter waves of new regulations and laws as the government tries to figure out how, or even if, digital assets fit into the existing tax system. It’s a good idea to get an idea of ​​what you’re hooked on for now, before it changes yet again.

—Lindsey ChooE-mail | twitter)

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