written on behalf of Feigenbaum Law
We’ve blogged in the past about the rise of cryptocurrencies (“crypto”) and the implications that they have had on the economy and tax laws. One of the initial promises around crypto, and perhaps one of its more appealing factors, is that it was designed to operate outside of the traditional economy. However, cryptocurrency has been unable to evade the effects of the recent downturn in the economy, with the price of the most well-known cryptocurrency, Bitcoin, having lost about 40 percent of its value over the last year. Despite the general drop in crypto’s value, it is still something that governments are attempting to tax. We wanted to provide a few updates on that topic in this week’s blog.
An article published by Bloomberg in June outlines the trouble the US government has had in attempting to collect taxes people owe on their crypto earnings. Late in 2021, the IRS announced it expected people to report any crypto earnings on their 1041 tax form. The government went so far as to include an entry space specifically for crypto activity, including the receiving, selling, exchanging, or dispensing of any virtual currency.
Of course, not everyone necessarily wants to come forward to report the earnings they made on crypto-related activities. For this reason, the US government has announced that it is preparing to enforce crypto brokers and exchanges to start gathering and sharing detailed information about their clients’ trading activities. A law is expected to be passed in January 2023 to this effect. The information collected would be similar to that collected when people use brokers to trade stocks or bonds. The required information would include the amount of profits people made in selling their crypto assets.The law has been met with criticism that the legislation was drafted too broadly. The IRS and the Treasury declined to comment on possible delays in the Bloomberg article, which the publication learned about through unnamed sources. We will be sure to let our readers know if an official statement is made.
In Canada, holders of crypto assets are also required to report gains they received. In addition, if someone receives crypto in exchange for goods or services, that exchange must be reported, and the crypto will be treated as income under the country’s rules for barter transactions. With tax season having recently concluded, there is no news at this time as to whether or not people complied with this requirement to the degree that the CRA expected.
A requirement also exists in the United States that requires individuals to report crypto they receive through the exchange of goods and services. On this, the IRS website states simply, “When you sell virtual currency, you must recognize any capital gain or loss on the sale.”
There is a chance, however, that this rule could change. It has recently been reported that some US senators are trying to exempt small transactions from this requirement. There has been a bipartisan effort from senators in Pennsylvania and Arizona who have introduced what is dubbed the “Virtual Currency Tax Fairness Act.” The proposed legislation would not require tax reporting for transactions up to $50 in value or in which less than $50 was earned. The article states that the effort is not the first of its kind, and that Senators from Wyoming and New York also introduced a similar bill earlier in the year.
Republican Senator Patrick Toomey of Pennsylvania commented on what drove him to put the legislation forward: “[W]hile digital currencies have the potential to become an ordinary part of Americans’ everyday lives, our current tax code stands in the way.” The driving factor in the efforts to reduce tax liabilities is to allow crypto to be used for retail payments, subscriptions, and other small transactions.
Current reporting requirements make it hard for an individual or business involved in a large number of transactions to do so at scale. Readers may recall that we wrote about an increase in the number of people who are choosing to be paid with crypto currencies. While this law would not negate their need to file taxes, it would not be unreasonable to believe that the difficulties people and corporations experience in using crypto in smaller day-to-day transactions might also create barriers for its use in the larger economy or for larger transactions. The bill is far from becoming law, it should be noted. It still has to go through Congress, which is about to commence a long recess in the leadup to the midterm elections in November.
With the economy in a state of flux, it’s safe to assume that news around cryptocurrencies will continue to make headlines. At Feigenbaum Consulting, we look forward to continuing to follow crypto news and report back to our readers on how it intersects with the economy at large and how it is impacted by or impacts the tax worlds for individuals or businesses.
We recognize that tax planning is essential to any personal or corporate financial plan. We help individuals and organizations make well-informed choices intended to lower their tax burdens, avoid costly penalties and pitfalls, and ensure that they have a plan for long-term financial security. Whether you keep your assets in traditional forms or have ventured into the world of cryptocurrency, the highly experienced tax team at Feigenbaum Law can provide you with full tax services on both sides of the American-Canadian border. Contact us online or call us at 877-275-4792 to see how we can help you today.