Crypto Taxes USA Crypto Tax Regulations

What the U.S. Infrastructure Bill means for your Crypto

The U.S. Infrastructure Bill got signed into law Monday, November 15 by President Biden. You may have heard that this bill contains some provisions that will impact the reporting and taxation of cryptocurrency. Crypto Twitter was certainly full of comments about the impact that this bill would have on the crypto industry in the U.S. But how much of it is warranted? What impact will this bill actually have on your crypto taxes?

What does the bill actually do?

The most significant change that the U.S. Infrastructure Bill brings to crypto is that starting with January 1, 2023, every crypto exchange and platform considered a broker will have to issue 1099s for all their U.S. customers. This means that every centralized exchange (and any decentralized ones that are considered brokers) will have to report all your crypto trades in a Form 1099, a copy of which will be mailed to you, and another copy that will be mailed to the IRS. Afterward, when you file your tax return, the IRS will match the 1099 it received from exchanges to the information on your tax return to make sure you have reported all your income.

The bill also requires brokers to report the tax basis for transferred coins/tokens when transferred to another exchange. For example, this means that if you buy Bitcoin on Kraken and then send it to Coinbase, Kraken would have to report to Coinbase the cost of your Bitcoin so that Coinbase can later issue a 1099 with accurate information.

The bill also contains a provision that requires brokers to report transfers of coins where the recipient’s address is not a broker – that Bitcoin you are sending you your Ledger or the Ether you are sending to your Metamask – all will be reportable transactions. But, again, keep in mind that this is purely for the purposes of collecting information and for the IRS to be able to track your tax basis. Certainly raises a question of user privacy, however, that is an entirely different topic.

Lastly, the bill will also make any transaction (or series of related transactions) of more than $10,000 reportable.  While this may sound like a lot of oversight, this is no different than the existing law – it is simply expanding the existing reporting to crypto transactions, which ultimately will drive mainstream adoption as AML regulations get better.

I’m Confused – What is a 1099 Again?

A Form 1099 is how traditional brokers report your gains and losses from stocks or other securities.  If you invest in stocks, you don’t need software to figure out your gains – your broker sends you a Form 1099 at the end of the year. This form has all the information necessary for your taxes (trade date, proceeds, cost basis, gain or loss, acquisition of traded asset) – so all you do is take this form and input it into the tax software or give it to your accountant. The form 1099 is what you use to complete your Form 8949.

Up until now, crypto has not had 1099 reporting, except for a few exchanges that decided to issue Form 1099-K (which is, by the way, the wrong form for various reasons). However, with the Infrastructure Bill, crypto exchanges have to issue 1099s as well starting in 2023 – although we expect some exchanges will be more proactive and issue 1099s sooner.

So I won’t need tax software in 2023?

Not exactly. You see, in a perfect world, you would be able to simply collect all your 1099s and complete your crypto tax puzzle this way. But what happens when you are trading on DEX’s? What happens when you are using NFT’s in a play-to-earn game? What happens when you do something which is not through a centralized exchange or even start transferring between wallets? What if you want to proactively plan before making a trade?  

Crypto is connected – you cannot look at crypto through the lens of only one exchange. So, if you are a user using any DeFi platforms, who will do all this reporting? Certainly not the smart contract. It is possible some DeFi platforms will be seen as brokers and have to report, but what about the truly decentralized ones? When you transfer crypto back from your Metamask to Coinbase and cash out, Coinbase will have the right proceeds number, but chances are they will not have the correct tax basis for this transaction, which will be a problem for you. Fortunately, Accointing.com will continue to help you track all this information as we continue to improve our reporting to help reconcile to 1099s and avoid confusion.

David Canedo, CPA

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