The Infrastructure Bill Passed last week and in what I can only call a bait and switch, at best, the government is going to go after your crypto earnings. The idea is that they will help pay for the bill by taxing crypto (I have never been against paying tax on your actual earnings as I have written about) but it looks more like the beginnings of an attempt to regulate crypto.
To start, one provision would require each “broker,” which will mainly be exchanges, to report their cryptocurrency gains in a type of 1099 form. All this new paperwork is one of the reasons for trying to hire 80,000 additional IRS agents. “Brokers” will also have to disclose the names and addresses of their customers and you know how well this will go over with people purposely getting into crypto to avoid this type of things.
Critics worry that as written, the provision’s definition of a “broker”Is too broad, or In reality not defined at all. Cryptocurrency advocates are concerned that the current language could potentially target those without customers who wouldn’t have access to the information needed to comply. In response to these fears, the U.S. Treasury Department said in August that it will not target miners, hardware developers and others, I guess we just have to trust them on this since the wording of the bill does not place this limitation and can easily become reality whenever the government pleases.
However, this provision will still impact cryptocurrency investors, says Shehan Chandrasekera, a CPA at CoinTracker. A “broker” or exchange must send a Form 1099-B to both the Internal Revenue Service (IRS) and their customer. The customer uses information from the 1099-B to calculate their preliminary gains and losses, which is reported on their own tax return. This would be similar to what a traditional broker already does.
However, “these 1099s are going to be inaccurate for the most part, because these exchanges don’t have visibility into what you have in your in your private wallet.” Chandrasekera says. With a private wallet, investors own their keys and cryptocurrency holdings, rather than using a third party, such as an exchange.
Here is where it can get "off the chain" (see what I did there?) If an investor were to send $100,000 worth of bitcoin from their wallet to COINBASE and sell the funds, Coinbase would be required to issue a 1099 saying that the investor sold $100,000. But Coinbase will not know how much the investor initially paid for the bitcoin because it didn’t happen on the exchange.
So when an investor gets a 1099 saying they made 100,000 dollars on paper, it will be up to them to sort it out. Now the question is, can an investor just say I broke even on this, but, the information is in my private wallet and the IRS can go pound sand? I doubt it. Crypto owners will probably need to prove this by showing what happened in their private wallet. This seems like a can of worms is getting opened up and I can't wait to see how it goes.
