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Readers of The American Genius have been hip to Bitcoin for a long time. However, with the laws constantly changing, both in the US and abroad, sometimes a little refresher helps. Especially now, with the Biden administration introducing new laws and regulations for how Bitcoin and cryptocurrency is reported and taxed.
When Bitcoin launched in 2009, it was presented as a democratized, untraceable currency that was decoupled from any government or regulatory body. It presented a world of opportunity for accumulating wealth that didn’t need to be reported — or taxed. Like many similar ventures, the people who got in early have made and sold fortunes. The people who came later encountered both pitfalls and guardrails that didn’t exist for the first wave. For better or for worse, the cryptocurrency wild west got slightly less wild pretty quickly, as such things go.
According to reporting by Norton Rose Fulbright, “In 2014, IRS issued Notice 2014-21 (the Notice), stating that cryptocurrency was to be treated as property, rather than currency for US federal income tax purposes. The IRS also stated that taxpayers must “in computing gross income, include the fair market value of the virtual currency, measured in US dollars, as of the date the virtual currency was received.” Following the Notice, anyone spending or exchanging a cryptocurrency was treated, “as if he or she was selling an asset and was required to report any resulting gain or loss for US federal income tax purposes on their return.”
This meant that while cryptocurrency was still decentralized, it was now recognized by the US government and taxed accordingly.
Articles like this one, last updated in July 2023, offer ways to legally keep your crypto holdings from being taxed. That said, it’s as much of a shell game as any other financial advice for avoiding taxes. Keep the money moving, and Uncle Sam will never quite catch up.
In August 2023, new rules were introduced to mitigate evasion of taxes levied on crypto, as reported by Reuters. A new form, 1099-DA, where “DA” stands for digital assets, is intended to make calculating taxes easier on consumers. In the same Reuters piece, Miller Whitehouse-Levine is quoted saying, “Today’s proposal from the IRS is confusing, self-refuting, and misguided. It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don’t exist.” Whitehouse-Levine is the CEO of DeFi, a lobbying group working to maintain crypto’s decentralization from the US government.
Not all crypto activists agree with this, however. Also according to Reuters, Blockchain Association CEO Kristin Smith said in a statement that if done correctly, the new rules “could help provide everyday crypto users with the necessary information to accurately comply with tax laws.”
Calling this a “new tax” feels like a bit of a misnomer, as there doesn’t seem to be a new percentage of the whole or a new element of cryptocurrency being taxed. Rather, the proposal aims to update how holdings are reported at tax time. Currently, as mentioned above, crypto holders are required to calculate their owed taxes based on its valuation on its date of purchase. If you made a profit, that gets taxed. If you experienced a loss, you are entitled to write off the loss on your taxes. The 1099-DA, as proposed, will help make that calculation easier for consumers.
While this sounds reasonable when compared to how assets in general are taxed, it can feel like a gotcha to those who bought into Bitcoin hoping for untaxed wealth. The new rule is set to go into effect in 2025, and will be applied to 2026 filings. Feedback on the new proposal will be accepted until October 30th. More information about the proposal and how to submit feedback can be found here.
