The IRS has noticed the Bitcoin bull run too -- investors take heed.
According to recent responses in a Benzinga article that I posted regarding Bitcoin and Taxes, experts stated that there are 18 to 21 million new retail crypto investors who are going to have to deal with declaring crypto gains.
The zeal with which Bitcoin HODLers have celebrated the meteoric rise of BTC is hard to overstate. Tweets yesterday are calling for BTC to break the $50,000 barrier and with over a 300% gain in the past 12 months and Bitcoin's price currently $46,950.00, the predictions of Bitcoin reaching $100,000 or more by end of the year don't seem unreasonable.
However, April 15th is just two months away and investors in the U.S. will have to face declaring crypto gains on their taxes -- even though they and their CPAs may have no experience with doing so. The IRS is paying attention and has added a first-page area to declare these gains, but decentralized investments carry new challenges when communicating with a centralized government that has a naturally centralized idea of what property and gains mean.
We spoke with Wendy Walker, Solution Principal for Sovos. Wendy has helped lead Sovos' go-to-market strategy focused on growing the Tax & Regulatory Reporting line of business.
Wendy believes in a fair and transparent tax system and a system that provides administrative ease. Her philosophy is to advocate for business and individual taxpayers while balancing the need for fairness and transparency in the tax system.
Here are Wendy's full responses to our questions, with some editing for length.
Wendy Walker, Solution Principal for Sovos
There are more retail investors than ever since the 2020-21 Bitcoin bull run -- do you anticipate problems in filing taxes in the US based on crypto earnings?
It’s fantastic to see the retail investor crowd embrace this new asset class. That said, I do anticipate many individuals will encounter challenges when attempting to file their taxes this year. There are two primary headaches when it comes to retail investors executing their taxes related to crypto trading:
- Establishing cost-basis – As they say, crypto never sleeps and can be traded 24/7 through numerous platforms who all have their own data oracles used for pricing information. Crypto assets can be transferred between platforms seamlessly to take advantage of price discrepancies. This is all fantastic for the retail investor -can you imagine if individuals were simply able to transfer their GME away from Robinhood after encountering trading issues? That’s what digital assets enable. However, it creates a nightmare scenario when it comes to establishing a cost-basis for trading activity. It is the individual investor’s responsibility to note purchase price, sell price and the associated gain or loss to be aggregated to their 8949.
- No uniformity in third-party reporting – When trading equities on Robinhood, or through an eTrade account, at the end of the year an individual receives a 1099-B from the broker/dealer of choice. This same 1099-B is sent to the IRS which they use to ensure individuals are reporting their income accurately.
However in the digital asset space, there is no clear guidance from the IRS as to what is required from crypto exchanges and as a result, individual investors receive a variety of different 1099 forms, all of which report gross proceeds rather than actual gains/losses. As a result, the IRS is left to assume crypto investors are underpaying their taxes and a CP2000 notice is then generated and sent to the taxpayer.
This past September, the Treasury Inspector General for Tax Administration issued a report highlighting this discrepancy and suggested potential solutions. Hopefully, the IRS will take their advice and issue clear guidance.
How common was it to declare earnings from decentralized investments in years past, before BTC became so mainstream?
Less common than it is now. Many serious crypto investors understand the importance of proper tax compliance. Having said that, crypto exchanges are just starting to report 1099 information to the IRS (if at all) -- and it’s safe to assume that many crypto investors have turned a blind eye to proper crypto tax procedures.
Is a more defined regulatory framework for crypto helpful to the average taxpayer in the US?
Absolutely. Clear guidance from the IRS will bring uniformity in how broker-dealers (cryptocurrency exchanges) report their users’ gains and losses via the 1099 process - which provides transparency to the taxpayer and to the IRS. This also puts crypto exchanges on par with other equity trading platforms and mitigates a tremendous amount of confusion.
Are there any changes for good or ill you see coming our way under the new administration in terms of how crypto/crypto earnings are classified?
Not really. In 2019, President Donald Trump said he “was not a fan” of Bitcoin but overall his administration wasn’t particularly aggressive in stifling the digital currency’s growth. His appointment of Coinbase veteran Brian Brooks as Comptroller of the Currency was certainly beneficial to the industry.
Since taking office, President Biden appointed former CFTC Chairman, Gary Gensler as Head of the Securities and Exchange Commission, this is noteworthy as Gensler is someone who truly understands blockchain technology and digital currencies and even taught classes on the subjects at MIT.
The truth is, the subject of digital currencies and their place in the United States financial system is a very bi-partisan issue. Of course, each side of the aisle has its own concerns but any legislation that has been passed through congress related to the advancement of digital currencies and blockchain technology has had bipartisan backing. Senator Cynthia Lummis, a Republican from Wyoming on the Senate Banking Committee is a known Bitcoin advocate and HODLer while Congressman Darren Soto, Democrat from Florida, led the charge to pass the Digital Taxonomy Act (H.R. 2154) and the Blockchain Innovation Act (H.R. 8128) this past September.
What are the three best things a retail investor who is making some money in the crypto market can do for themselves from a tax perspective?
- Keep a detailed paper trail of all of your trading activity in the event of an audit.
- Pick a crypto tax solution designed for retail investors to help in this process. There are several out there that allow investors to aggregate their trading activity across several crypto exchanges all in one place. This will make your life infinitely easier.
- Pay your taxes. No one enjoys doing it but chances are it will save you time, money, and anxiety in the long run.
Anything you'd like to add?
Digital assets and blockchain technology provide pragmatic solutions to an inefficient, legacy system that has left many behind. The advantageous nature of this new technology will be felt on Wall Street and Main Street alike. There will be growing pains, several I’m sure, but in the end, it will all be worth it to build a more inclusive and efficient financial system.
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We are finally seeing the mainstreaming of crypto that advocates have been anticipating for 11 years. Taxes will be an unavoidable part of this shift as more retail investors explore Bitcoin and other tokens, such as Ethereum.
New investors would be wise to explore the issue now if they haven't already. Do your homework, talk to your accountant, and accept that as Bitcoin becomes an accepted asset from the point of view of the U.S. government, it is taxable as is any other form of property or earnings.
We are finally seeing the mainstreaming of crypto that advocates have been anticipating for 11 years. Taxes will be an unavoidable part of this shift as more retail investors explore Bitcoin and other tokens, such as Ethereum.
New investors would be wise to explore the issue now if they haven't already. Do your homework, talk to your accountant, and accept that as Bitcoin becomes an accepted asset from the point of view of the U.S. government, it is taxable as is any other form of property or earnings.
Cover image is a composite with elements by Clker-Free-Vector-Images, Tomislav Kaučić, and Michael Laut from Pixabay