IRS Crypto Tax Proposal Draws Criticism From Coinbase And Other Experts

The US Internal Revenue Service has released a 300-page proposal that would affect data collection for crypto exchanges.

Interestingly, the report is actually an attempt by the IRS to comply with a law that is not actually about crypto- the Infrastructure and Jobs Act.

Presently, the IRS’ proposal is out for public comments, due by October 30. And thus far, several experts and crypto companies have expressed dissatisfaction with the proposal.

The Infrastructure Investment and Jobs Act, initially unrelated to cryptocurrency, includes provisions for increased financial surveillance over crypto users. The IRS’s proposal, while not as severe as initially feared, raises concerns about mandatory reporting by businesses based on their ability to collect customer information.

Critics argue that the proposed approach violates privacy rights and expands financial surveillance. The focus on the ability to collect information rather than the necessity of collecting it challenges the principles of privacy and raises questions about the constitutionality of such reporting requirements.

Navigating Cryptocurrency Taxation: Core Principles

Tax professionals play a crucial role in guiding clients on cryptocurrency taxation, and understanding core principles is paramount:

Treat Cryptocurrency Like Property:

Cryptocurrency, being classified as property, adheres to standard property tax rules. Reporting capital gains or losses from crypto transactions is akin to handling real estate or stock transactions.

Identify Taxable Events:

Recognizing which crypto activities trigger tax implications is crucial. Selling, trading, spending, earning, and activities like staking or mining can lead to tax consequences. The timing and nature of these events determine tax obligations.

DeFi and ICOs:

Understanding the taxation nuances of decentralised finance (DeFi) and Initial Coin Offerings (ICOs) is vital. Tax professionals should be aware of the varied treatment of tokens received from ICOs and navigate the complexities of DeFi transactions.

Stay Informed About Regulatory Changes:

The rapidly evolving regulatory landscape for digital assets demands tax professionals stay well-informed. Federal agencies globally are actively shaping crypto regulations, necessitating continuous monitoring and adaptation to stay current.

Engage with Crypto Communities:

Active participation in cryptocurrency communities provides tax professionals with insights into the latest trends, challenges, and tools relevant to crypto taxes. Utilising platforms like Telegram, Discord, and Reddit or attending crypto conferences fosters a deeper understanding.

Utilise Crypto Tax Software:

To streamline accounting and reporting for cryptocurrency taxes, tax professionals can leverage specialised software. These tools facilitate quick and efficient processing, connecting with various blockchains and exchanges, importing transaction data, and generating customised tax reports.

The IRS’s recent guidance on staking rewards introduces complexity and inconsistencies. Staking rewards are treated as immediate income when under the control of the taxpayer, creating challenges for those with locked or non-instantaneous rewards.

The IRS’s stance is criticised for disregarding established tax principles, such as income realisation upon sale or exchange. The lack of clarity on whether staked tokens qualify as “newly created property” adds to the confusion, raising concerns about administrative burdens and potential financial gymnastics for stakers.

Coinbase, a major U.S. crypto exchange, voiced concerns over the IRS’s proposed rule defining crypto brokers. The exchange argues that the rule poses unprecedented privacy threats and imposes burdensome reporting requirements. Coinbase urges a revision of the proposal to limit compliance requirements to parties directly involved in digital asset transactions.

The Blockchain Association echoes similar concerns, suggesting potential negative consequences for the industry.

Nicholas Anthony, a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, argued that the new proposals would create a new default for companies to report on their customers.

That being said, some senators, including Elizabeth Warren, have expressed support for the IRS proposal, emphasising the need for swift implementation to enhance tax revenue. Warren has also encouraged the IRS to disregard industry complaints.

* Original content written by Coinlive. Coinbold is licensed to distribute this content by Coinlive.

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