Talk of cryptocurrency regulation is heating up – with the passage of the Inflation Reduction Act, 2022 may in fact be the year we get comprehensive regulatory and legislative clarity surrounding crypto assets for the US.
In addition to the Inflation Reduction Act, President Biden signed an Executive Order earlier this year mandating and directing federal agencies to provide clear and meaningful guidance for crypto. The Infrastructure Bill, which was signed into law in 2021 also has changes to the definition of brokers that will mandate tax information reporting (1099 generation) for companies involved in trade-side cryptocurrency markets. From this, we’ll likely see the soon-to-be rolled-out 1099-DA form for digital assets.
However, what does the Inflation Reduction Act specifically mean for cryptocurrency and cryptocurrency taxes?
The bill will introduce a number of sweeping changes to a variety of areas in the U.S. Federal government, including the Internal Revenue Service, IRS.
The bill allocates approximately $80 Billion to the IRS over the next decade, which represents a roughly 75% increase in the IRS’s yearly operational budget, currently set at $12.6 billion.
This ultimately spells out a significant increase in IRS operations – with crypto nearing the top of the list of their priorities.
It’s no question that the IRS has been backlogged for years, with a backlog of over 20 million returns; and this additional budget will inevitably help the agency catch back up. However, it will also allow the IRS to put out more definitive guidance on the taxation of crypto assets. Notice 2014-21 from the IRS describes the basic tax treatment of virtual currency and contains a brief FAQ, but concrete guidance around crypto has been lacking for years from the agency. Here’s an excerpt from the bill around crypto and digital assets:
…(ii) ENFORCEMENT.—For necessary expenses for tax enforcement activities of the Internal Revenue Service to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations (including investigative technology), to provide digital asset monitoring and compliance activities, …
There’s no question among industry crypto tax experts that a direct result of the infrastructure bill will be increased guidance and potential regulation surrounding crypto. It’s also important to note that IRS guidance can in some cases be retroactive, necessitating existing crypto traders and institutions to get a handle on the crypto data aggregation now, as opposed to after guidance comes out.
So, what’s on the IRS’s shopping list?
Compliance and enforcement. While these are vague terms on the surface, crypto tax experts recognize the biggest gaping hole in the IRS’s current compliance and enforcement practices surrounding the crypto industry. It’s a natural progression to assume that the IRS’s scrutiny of the crypto market is potentially heating up.
For institutions, exchanges, taxpayers, or tax professionals looking to get ahead of the game on future regulation surrounding crypto, Ledgible is here to support you. Ledgible builds and offers tools that aggregate, normalize, and make crypto data Ledgible. Built for professionals, by professionals, the Ledgible platform is the a preferred solution for crypto tax and accounting for tax professionals, CPAs, institutions, accountants, and the finance industry.
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