New U.S. tax infra legislation could be problematic for taxpayers

Starting Jan. 1, 2024, centralized exchanges must send 1099-B forms on behalf of their clients as “brokers” under U.S. President Joe Biden’s tax infrastructure bill. 

Historically, brokerage firms have been mandated by law to file the form in order to ensure that capital gains on stocks and securities are reported to the Internal Revenue Service.

If an individual purchases a stock for $400 and sells it on Robinhood for $500 in 2021, Robinhood is required to provide a Form 1099-B that indicates $100 is taxable.

The IRS receives Copy A of this form, the individual receives Copy B, and the state receives Copy 1. This form is sent to the IRS, the individual, and the state.

What happens if a DEX is used?

Decentralized exchanges do not collect KYC data, resulting in incomplete 1099-B Copy A and Copy 1.

If one buys 1 ETH from a DEX for $500 and sells it for $1,000 on a controlled exchange, the capital gain is $500. 

The centralized would only report $1,000 on their 1099-B because they have no means of knowing the DEX price. 

So tax is charged on $1,000 instead of $1,000 – $500. When selling bitcoin to Binance for $20,000, a $10,000 LedgerX cold hardware wallet containing bitcoin owes $10,000 in taxes. 

These inconsistencies may have multiple effects. If a customer receives an incomplete 1099-B from the exchange, they overpay tax. 

If taxpayers utilize third-party software to gather transaction data, including on DEXes and private wallets, the IRS and state versions of the 1099-B will be different.

The new bill will benefit people who purchase and sell crypto through a single controlled exchange.

U.S. crypto investors should keep track of their cost basis (initial price) and hire a crypto-savvy tax professional when submitting taxes with the IRS.

Aspects of the legislation to consider

Could the new tax bill deter crypto investments, lowering their returns? Will the IRS utilize analytics to link cold wallet addresses to individuals?

Previously, the IRS considered cryptocurrency and all connected transactions as property. The bill also requires businesses to notify buyers of $10,000 or more in crypto to the government. 

According to the Joint Committee on Taxation, the plan will raise $28 billion over 10 years.

 

Image courtesy of Cointelegraph News/YouTube

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