Last week, President Joe Biden signed the $1.2 trillion infrastructure bill, which changes the US public works system. The law includes tax provisions for digital assets like cryptocurrencies and non-fungible tokens (NFTs). These new tax rules are expected to raise an additional $28 billion. The Internal Revenue Services recognized cryptocurrencies as taxable properties quite some time ago. On the other hand, the Securities and Exchange Commission Supreme Court ruling from 1946 (SEC vs. Howey) to determine whether or not a digital asset qualifies as securities. The current infrastructure bill will have tighter reporting regulations. The new legislation emphasizes know-your-customer (KYC) and tax reporting systems. A crypto broker will have to report the transfers of digital assets to any unknown accounts and addresses.
A point of contention in the bill is the definition of “digital-asset broker,” which is defined as any person facilitating the transfer of digital assets on behalf of another person. Some critics said that such a broad definition could capture cryptocurrency miners and software developers who could curb technological innovation. However, the legislators have said that these provisions would not be used to target crypto brokers. The infrastructure bill targets cryptocurrency holders who intentionally misreport or underreport their crypto taxes. The new rules extend to all transfers of digital assets irrespective of whether it is a sale or just an exchange. The increase in crypto scams and frauds globally and the blockchain revolution have left regulators worried. This is why legislators try to have tighter control over the crypto space.
One of the new legislative provisions is that brokers report their crypto gains in a type of 1099 form. They are also supposed to report the names and addresses of their customers. All the brokers will have to send a form 1099-B to Internal Revenue Services and their customers. In turn, the customers will use the information from the 1099-B form to calculate their profits and losses and report it on their tax returns.
Privacy and Surveillance
Another provision expands the U.S. charge code called 6050I to incorporate digital assets. Section 6050I necessitates individuals who get more than $10,000 in real money and equivalent to file a report with the Internal Revenue Services. The report incorporates details regarding who paid them, including names and Social Security numbers. Any inability to report such details about people sending such payments will be viewed as a criminal offense under the regulation. The infrastructure bill would require reporting requirements from businesses and trades to get more than $10,000 in digital currency.
For example, say you buy a Tesla using your digital currencies. Then Tesla will have to collect and report your personal information like the IRS’s name, address, and social security numbers. This is a concern for crypto lobbyists and advocates who are conscious of their privacy. They are concerned that businesses and traders may not have the means to collect and protect their private information.
Know Your Customer (KYC)
Having exact data to recognize your clients is of vital significance, and these requirements may be elevated by the prerequisites of the new cryptocurrency reporting system. The more data a firm has on their customers and the records they are moving their digital assets, the lower their reporting prerequisites will be under the system set up in the Infrastructure Investment and Jobs Act.
All cryptocurrency transactions can be traced in the super durable record of Blockchain. But account proprietorship and wallet data aren’t public. With the right apparatuses and examination, specialists and law-authorization can investigate digital currency exchanges and linkages to IP addresses, digital money wallets, and integrated-entity information to find people involved in money laundering, tax evasion, and other criminal behavior.
What Owners of Digital Assets Need to Do?
Those who own digital currencies need to understand the new crypto reporting requirements, especially the new rules around the taxation of digital assets. They need to report all their cryptocurrency transactions, including their gains and losses on Form 1099 (or other applications drafted by the IRS) and yearly tax return forms.
Besides that, those holding cryptocurrencies should be mindful of the evolving rules around digital currencies. Since 2019, the IRS has said that it will consider all “hard forks” as taxable events (after the Ethereum’s London hard fork that occurred on 5 August 2021). Furthermore, the IRS has also distributed FAQs to remind Americans that all crypto exchanges will have to be reported by taxpayers, notwithstanding the Form 1099, W-2, and so on. Additionally, the IRS has specifically asked taxpayers to report on Form 1040 any monetary interests they have procured in a tax year by selling, receiving, sending, and trading digital currencies.
Similarly, cryptocurrency owners should be ready to go through more KYC audits by the companies and firms they transact with. This will include any occasional refresh process that firms will utilize to ensure that they have precise, up-to-date information about their clients. Further, those holding cryptocurrencies must be prepared to provide data on their location, tax status, citizenship, and other information needed to comply with the Anti Money Laundering (AML) regulations and Combating Financial Terrorism (CFT) guidelines. It seems like with these regulations the days of performing anonymous cryptocurrency transactions through American monetary firms and cryptocurrency brokers will soon come to an end.
The Bottom Line
Increasing regulation on digital assets like cryptocurrencies and NFTs means the government has started recognizing them as real assets. Greater regulation on digital assets will mean greater legitimization from the government and citizens, which will lead to more mainstream adoption. At Unbanked, we believe that cryptocurrencies are the drivers of technological innovation. Read our blog to know more about how you can invest in cryptocurrencies and enter the crypto market.