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(Kitco News) -
Four U.S. lawmakers have written a letter urging the Internal Revenue Service (IRS) and the Treasury Department to close the loopholes they claim are being used by crypto traders to evade taxes.
In an Aug. 1 letter addressed to the Treasury and the IRS, Democratic Senators Elizabeth Warren, Bernie Sanders, Bob Casey and Richard Blumenthal called for swift action to “quickly propose and implement strong rules that close loopholes exploited by crypto tax evaders.”
“In November 2021, Congress passed the Infrastructure Investment and Jobs Act (IIJA), which directed Treasury and IRS to implement new rules requiring third-party crypto brokers to report relevant information on sales, gains, and losses to the IRS,” they wrote, adding that Congress directed Treasury to have the new rules ready for the 2024 tax season.
“Nearly two years have passed since the law was enacted, and the implementation deadline is less than six months away – but Treasury has yet to publish proposed rules,” the senators wrote. “Without quick action, your agencies are at risk of failing to meet their congressionally-mandated deadlines for implementation of a final rule.”
The lawmakers cited studies that indicate current tax regulations result in “at least a $50 billion crypto tax gap,” and wrote that if Treasury and the IRS fail to implement the new rules in time, “they risk missing out on roughly $1.5 billion in tax revenue for the 2024 fiscal year.”
“Given the chance, tax evaders and the crypto intermediaries willing to aid them will continue to game the system, exploit loopholes, and siphon off billions of dollars a year from the U.S. government,” they said. “You must not give them that chance.”
The four senators urged Treasury and the IRS to “act swiftly” to publish and implement new rules before the December 31, 2023 deadline, and to respond to their letter no later than August 15, 2023.
The IRS has made recent moves to address gaps in the tax code related to cryptocurrencies and digital assets. On July 31, the agency issued a ruling that U.S. cryptocurrency investors must report staking rewards as part of their gross income in the year it was received.
Before the announcement, it was unclear whether investors needed to report any earnings generated by staking activities. There has also been confusion around when these rewards need to be reported, as rewards can accumulate in a smart contract, and a user doesn’t take possession until they claim those rewards.
“If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards,” the IRS said in its ruling.
“Dominion” is defined as the time when the investor controls and has the ability to sell, exchange, or otherwise dispose of the cryptocurrency rewards.
The fair market value of any rewards is determined by the “date and time the taxpayer gains dominion and control over the validation rewards,” the ruling states. “The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation.”
This ruling from the IRS seeks to provide clarity regarding taxpayer requirements related to PoS blockchains, and its the latest development in the slowly evolving regulatory landscape around digital assets in the U.S. The IRS previously subjected crypto-mining rewards to both income and capital gains tax but had no provisions for staking rewards until now, according to crypto tax firm Koinly.
The senators’ letter is not the first time this year that U.S. lawmakers have called on the Federal government to better enforce tax regulations on crypto. On June 5, Brad Sherman, Ranking Member of the Subcommittee on Capital Markets, and Stephen Lynch, Ranking Member of the Subcommittee on Digital Assets, Financial Technology and Inclusion, wrote a letter to Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel urging them to help close the tax gap by bringing crypto firms into compliance.
“We write to express our deep concern about the state of tax compliance by the cryptocurrency industry,” they said. “For years now, that industry has been a major source of tax evasion and a significant part of the nation's tax gap.”
Sherman and Lynch wrote that in September 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued a report claiming that “[t]he IRS cannot easily identify taxpayers with virtual currency transactions because of the lack of third-party information reporting that specifically identifies virtual currency transactions.”
After Congress passed the IIJA in November of 2021, crypto brokers were required to begin tracking and reporting customers’ crypto transactions on behalf of the IRS. “The law clearly states that taxpayers should begin receiving 1099s for tax filing year 2023,” they said.
But in December 2022, the Treasury Department told cryptocurrency brokers they would not have to track customer transactions “until it issued final regulations about this requirement.” They said that Treasury completed its review of the regulations in February. “It is now May, and the proposed regulations have yet to be promulgated,” they wrote.
“The cryptocurrency industry had all of 2022 to prepare for the infrastructure law's tax reporting requirements and now it apparently gets 2023 off as well,” the Congressmen said. “We hope Treasury/IRS will promptly release the proposed regulations so we can close the tax gap and bring the cryptocurrency industry into full tax compliance.”
Not all their fellow members of the House are quite so eager to see the IRS with more power over crypto, however. On Mar. 7, a bipartisan group of U.S. lawmakers co-led by House Financial Services Committee Chair Patrick McHenry and Rep. Ritchie Torres announced plans to reintroduce legislation that would reform the crypto tax reporting provisions that were first introduced in 2021’s IIJA. The lawmakers want to change the Keep Innovation in America Act by narrowing the definition of a crypto ‘broker’ for tax purposes.
Based on a draft of the bill, the requirement for brokers to report on digital asset transactions worth more than $10,000 to the Internal Revenue Service would be pushed from 2024 to 2026. The terminology has also been altered so that “miners and validators, hardware and software developers, and protocol developers” are not considered to be brokers.
At the time the bill was first introduced, crypto advocates said that the law’s treatment of digital assets would burden non-financial firms like crypto miners and certain software providers with “impossible-to-fulfill reporting requirements.”
The updated draft bill addresses those concerns and goes a step further by applying significant limits to the federal government’s ability to define what a ‘digital asset’ is. The IIJA originally gave the Treasury Department discretionary power to define digital assets, but the changes to the Keep Innovation in America place limits on that power.
According to Rep. McHenry, the bill rectifies “misguided policy and regulatory overreach [that] threatens to push this dynamic industry – and its potential benefits – overseas.”
And later in March, Treasury and the IRS issued new guidance on non-fungible tokens (NFTs) and asked for feedback on their plan to tax them as collectibles.
NFTs have seen a significant rise in popularity since the bull market of 2021, with billions of dollars’ worth of transactions happening on NFT marketplaces like OpenSea, LooksRare and Blur.
