IWTA’s 2022 Crypto Roundup | International Wealth Tax Advisors


It’s been a big year for the crypto space. 2022 started strong, with more than $2.3 trillion in assets announced with mega hype, including Super Bowl ads and celebrity endorsements. However, as the year draws to a close, investors are in quite a different picture as bankruptcies unfold and currency prices plunge. How has the regulatory and investment environment changed and what are the necessary tax considerations?

US Tax Guidance Changes

The Internal Revenue Service made a number of adjustments to the digital currency filing requirements, including more direct questions about cryptocurrency holdings, with the most obvious change clearly noted in the draft. Form 1040 for 2022. Updated as of 2021, taxpayers will now answer additional questions about their “digital asset” holdings, including whether they sent or received crypto assets as income or gifts. Although taxpayers should verify whether or not they were given as gifts, a gift is taxable only if it exceeds the annual threshold of $16,000 or the lifetime threshold, which is currently $12.06 million.

Cryptocurrency Exchanges Reporting Taxable Activity

One of the provisions of the Infrastructure Investment and Jobs Act of 2021 was a requirement for cryptocurrency brokers to report client sales proceeds to the IRS on a 1099 form for assets held in taxable accounts. By starting to treat crypto assets more like traditional financial assets, investors will no longer be able to avoid tax rules for their crypto assets.

capital losses

Bitcoin started the year at over $46,000 per coin and has since tanked, falling as low as $15,000 at one point in November. In fact, recent analysis shows that more than 50% of bitcoin addresses are currently worth less than their original purchase price. Investors may wonder if it is time to close positions if they have not already done so. This can provide a plus point, as these capital losses, if held in taxable accounts, can be used to offset other capital gains, and these gains can be in any other asset class, including stocks or real estate.

Proof of Work to Proof of Stake

of ethereal Join resulted in the coin being transferred from proof-of-work to proof-of-stake, resulting in many investors receiving staking income. And the tax implications differ depending on your jurisdiction.

While there is still no clear guidance on the Ethereum event in the US, the IRS has previously defined and used the term airdrop in official tax guidance related to a cryptocurrency hard fork Merge-like event. In 2017, the IRS treated the Bitcoin hard fork as taxable income upon receipt of the coins, and capital gains were taxed when the coins were sold.

The taxes due to the Merger will depend on the jurisdiction of the investor. Based on guidance in the UK, it can be inferred that no income tax applies when receiving an airdrop. HM Revenue and Customs, the UK tax authority, has stated that the Merge upgrade was not a taxable event subject to capital gains. Instead, the cost basis of the existing Ethereum token will be attributed to the forked version of Ethereum, and any subsequent disposals will accrue a profit or loss as normal.

The potential of gas fees to offset crypto gains

Simply put, gas fees are blockchain transaction fees generated when users sell or trade their cryptocurrencies, and are typically paid to crypto miners or network validators for their services to the blockchain. Gas rates vary based on the amount of volume in the network: the higher the volume, the higher the rates. While most coins have gas fees, those on the Ethereum network are notoriously high, largely due to the many use cases for the Ethereum network, including decentralized applications, while the Bitcoin network is used for payments. .

Gas fees may be added to the cost basis of a transaction or business expenses, but may not be used to offset personal income.

yield farming

Yield farming is another relatively new concept that involves an investor lending or betting their cryptocurrency, usually through a platform using smart contracts. The crypto is lent on the blockchain and the investor receives interest and other rewards. While yield farming provides liquidity to decentralized finance applications, it is considered extremely risky for investors. While the IRS has yet to provide clear guidance on DeFi protocols and yield farming, any cryptocurrency earned through yield farming is considered regular taxable income.

NFTs

Currently, the creation of NFTs is not taxable, but if they are sold, the proceeds are considered gross income, taxable at the fair market value of the cash or cryptocurrency received and may be reduced by costs related to the creation and sale. (like gas). fees) from the NFT.

FTX

With the bankruptcy of the crypto exchange FTX, clients were left with their assets frozen. The result of the company is not clear. Investors may still get some of their funds back, or they may not. If FTX is closed and the assets are deemed not recoverable, the assets will be declared worthless and a capital loss, based on the value of the securities when purchased. However, until such clarity is provided, taxpayers will have to wait.

The cross-border standardization of crypto tax rules

Crypto tax changes and regulatory updates are not limited to the United States. Authorities around the world are also discussing the best way forward.

In an effort to increase transparency and decrease tax evasion among cooperating countries,

the crypto asset reporting framework (CAR) seeks to standardize the reporting of tax information for cryptoactive transactions. The scope of application includes both natural persons and controlling entities and persons.

Regulation of crypto asset markets, or Mica, aims to establish harmonized rules for crypto assets, requiring EU-based cryptocurrency companies to register and maintain minimum governance standards. The DAC-7 Directive, which will enter into force on January 1, 2023, introduces comprehensive documentation and reporting requirements for online platforms and marketplaces in the European Union. And the DAC-8 The directive seeks to ensure uniform disclosures as well as proper taxation due to investments in crypto assets.

The sources indicate that another proposal is in process, which requires cryptocurrency providers to report transaction details of EU customers to national tax authorities within the bloc. While details are scarce, reports indicate that the new law will cover cryptocurrencies, stablecoins, non-fungible tokens, and derivatives.

A recent provision calls for a 26% tax on cryptocurrency trading profits above €2,000. Additionally, a newly elected government bill gives taxpayers the option to declare their digital asset holdings, resulting in a 14% tax on the value of assets held at the beginning of the year.

It should be noted that several countries, including the Cayman Islands, Bermuda, Singapore, and Switzerland, are among the countries that currently have no capital gains or income tax on cryptocurrency holdings. This also applies to the US territory of Puerto Rico.

Cryptocurrency remains an emerging tax category

The crypto tax landscape is still nascent, with many complexities and guidance related to digital and tokenized assets set to be a priority for authorities in 2023. Careful consideration and advice from a tax advisor who is well-versed in the evolving landscape de cross-border digital asset tax rules are recommended to properly comply with tax obligations and avoid costly audits in the future.