How has the administration’s new crypto tax proposal affect your current digital strategy? How do recent price surges in many cryptocurrencies affect the taxable events of US taxpayers?
The value of many cryptocurrencies has been trending substantially upward over the past three months. Many of the most popular cryptocurrencies outside of the US have increased more than 75% in value over this period alone. Bitcoin has more than doubled in value since the same point last year. Many major asset managers are predicting continued expansion in the coming months.
US President Joe Biden has proposed the addition of “wash sale rules” to digital asset transactions, expansion of reporting requirements detailing crypto-related transactions involving financial institutions and/or digital brokers, updated “mark-to-market” rules and even an excise tax on the mining of digital assets.
A “wash sale” typically involves selling an asset to generate a capital loss, then reacquiring the same asset, often the very next day. New rules would modernize the tax code to update associated rules that presently apply to other investments, such as stocks, and apply them to digital assets such as cryptocurrency as well. The administration claims this change alone would generate over $1 Billion in additional taxes in 2025 alone.
Mark-to-Market (often referred to as MTM) is an accounting method for establishing the actual “present value” or “fair value” of investment accounts or assets with values that substantially fluctuate over any period of time. This is especially important for those who hold volatile assets (such as cryptocurrency) at the end of a fiscal or tax year and must establish the current value of those assets for a corporate balance sheet or individual schedules during tax preparation and calculation.
Recently, the US Financial Accounting Standards Board approved the application of mark-to-market accounting for business entities and corporations that hold digital assets including cryptocurrency. The administration projects the implementation of the new crypto tax proposal including mark-to-market rules for cryptocurrencies would generate an additional $8 Billion in tax revenues.
Those who hold and manage cryptocurrencies and digital assets, including Non-Fungible Tokens or NFTs, must consider the tax implications of any digital transaction based upon present rules. The IRS has clarified that a transfer of digital assets between “wallets” owned by the same taxpayer does not create a taxable event. The key idea here is ownership. If ownership doesn’t change, a transfer probably won’t result in a taxable event. It is important to maintain detailed, accurate records of all transactions to protect your interests and preserve the original cost-basis of the digital asset. However, if you sell or dispose any of your digital holdings to offset transfer fees a taxable event has more than likely occurred.
If the assets of a wallet are transferred to another wallet with different ownership a taxable event is likely to occur. Also, for those who wish to exchange cryptocurrency assets for other goods or services a taxable capital gain or loss will occur and reporting will apply.
Unlike the simple activity of moving a digital asset from one wallet to another (under the same ownership), if one trades a digital asset for a different cryptocurrency or another digital asset a capital gain or loss will occur and reporting requirements apply.
The new crypto tax proposal would further levy an excise tax in the amount of 30 percent of the cost of electricity required to power the digital assets (owned or leased) used to mine digital assets.
If you own, invest in, trade, or mine digital assets such as cryptocurrency, it is important to stay up to date with all current and proposed US tax laws. The IRS is applying advanced computer technology and artificial intelligence to identify and audit US taxpayers involved in digital asset transactions here in the US and around the world.
How will the IRS identify US taxpayers with undisclosed domestic of offshore digital assets? What do you need to know about present US tax proposals and how they might affect your present and future strategy? We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
