As we all know, cryptocurrencies are digital currencies like Bitcoin, Ethereum, and the like. There are also digital assets like the NFTs.
There are many misunderstandings and confusion about how these digital currencies and assets are taxed. This is because the IRS hasn’t provided any guidelines on them.
Many individuals in the cryptocurrency industry, including businesses and senators, want guidelines from the IRS, but they lack the funds and resources to do so. To this end, Senator Lummis and Senator Gillibrand proposed an Act to get more information on handling cryptocurrencies and taxes.
The Act comprises various sections that give recommendations on how digital assets should be handled. The goal is to define digital asset intermediary, distributed ledger technology, smart contract, stablecoins, and digital currencies and assets.
They also want to define the digital asset broker. This is important because it will determine what one is buying and from who and start requiring more exchanges to report their transactions to the IRS. This way, the IRS will have more information on the digital market and start taxing them duly.
Currently, the IRS doesn’t have sufficient information on the digital market and only relies on taxpayers to be compliant, report their gains or loss from cryptocurrencies, and pay taxes on them. Therefore, they have a difficult time enforcing it.
Earlier, we mentioned this Act comprises various sections. Here, we shall focus on Sections 201, 204, 205, 206, 207 and Section 208 of the Act as they have certain tax advantages to individuals.
Section 201 is trying to implement the De minimis exclusion. De minimis says if it is too small, it shouldn’t matter. Section 201 of this Act will implement the De minimis to exempt reporting of tax gain or loss of less than $200 on transactions of goods and services using cryptocurrencies.
For instance, you have $10 worth of cryptocurrency in your wallet and need to buy an item. After buying that item, you have to report to the IRS how much your currency was worth at original purchase and at the particular time of use. With this, a gain or loss is calculated to affect a tax return.
With this bill passing, you can spend as much as $199 in cryptocurrencies without having to pay taxes on the gain or loss amount. This section encourages more individuals to patronize cryptocurrencies in their daily transactions. In the same vein, it has been criticized as the majority will find using cryptocurrencies more attractive than the USD.
This section talks about Decentralized Autonomous Organizations (DAOs). These organizations use smart contracts, which are no longer news since they hit the headlines with cryptocurrency news.
Section 204 will treat these organizations as business entities. However, it is unclear how these organizations will fit into this classification based on the tax code.
Section 205 addresses virtual assets and lending-related matters. It determines how it will be treated when you lend out cryptocurrencies. Will it be taxed as interest or considered business income? Section 205 will address this.
The legislation will impose guidelines on IRS to issue information and guidance on how cryptocurrencies will be taxed. In the past, the IRS has been given deadlines and has failed to meet them.
Hopefully, with the Act’s implementation, the legislation will enforce a more concrete deadline on the IRS to provide information on taxing digital assets.
This section analyses digital currencies and assets in retirement accounts. People invest in cryptocurrencies in their retirement accounts. This is called a speculative investment.
A speculative investment is when you invest with the knowledge that there will be little or no profit from your investment. The IRS doesn’t like speculative investments in retirement accounts as they can be very volatile.
The Department of Justice is currently investigating and wants to research issues relating to investing in digital assets through your retirement account to determine if it is okay to proceed.
In 2014, the IRS stated that the reward you receive from mining or staking cryptocurrencies is taxable immediately, regardless of if it’s yet to be credited to your wallet.
Section 208 will reverse this stance and postpone the taxation resulting from your mining and staking activity.
This section benefits taxpayers as they can now wait till they have the earned reward in their wallet before paying tax on it as opposed to when they have to pay immediately, even if it means taking the funds from another source.
This bill will impact a significant effect on cryptocurrencies and their taxation. However, most cryptocurrency enthusiasts are looking forward to this bill passing because they want the government and the IRS to provide guidelines on how to go about it properly.