Fintech

You might be evading crypto taxes and not even know it

A new survey shows most crypto owners don’t understand all the scenarios in which they might owe taxes. And the rules for digital assets are just going to keep changing.

Crypto coin in Uncle Sam hat on an animal trap

The fast emergence of new crypto products and services has left the U.S. government a few steps behind.

Illustration: Christopher T. Fong/Protocol

Almost no crypto investors know all the situations in which their token-trading activities are taxable, a survey conducted by Wakefield Research for tax-prep assistance firm CoinTracker says.

While the Internal Revenue Service issued specific guidance in 2014, and updated it once again in 2019, the fast emergence of new crypto products and services has left the U.S. government a few steps behind. But a large number of crypto investors aren’t even aware of the existing guidelines.

Crypto tax ignorance is widespread, and that’s a problem both for taxpayers and the government. In the survey, when presented with a number of possible situations where crypto could be taxed, 97% of respondents got at least one answer wrong.

  • In fact, there are seven types of taxable crypto transactions: trading crypto for fiat, spending crypto, exchanging one type of crypto for another, earning interest, receiving staking rewards, generating mining income and receiving airdrops.
  • One of the biggest problems spotted by the survey was that most crypto investors didn’t know that trading one type of cryptocurrency for another is a taxable event, likely because they haven’t experienced similar transactions in the non-crypto world.
  • “It’s very rare for a U.S. taxpayer to have dealt with a scenario where they’re trading one equity directly for another — like, no one ever trades Facebook stock directly for Google stock,” CoinTracker co-founder Chandan Lodha told Protocol.
  • Another factor: Taxes get exponentially more complex when a user transacts crypto over multiple exchanges, which is common. The higher the number of exchanges, the more difficult it is to track taxes across the board.
  • It doesn’t help that crypto exchanges don’t typically provide tax forms showing annual capital gains and losses, largely for the above reason. But starting in the 2023 tax year, they’ll have to figure it out.

People think that they know what they’re in for, but chances are they don’t. Despite the obvious gaps the survey revealed, 54% of survey respondents felt confident in their knowledge of crypto taxes.

  • So even though some crypto investors think that they’ve been tax-compliant and think they know how to file, emerging use cases may present obstacles.
  • “The data suggests that it’s not because users are trying to evade taxes, or get around taxes using cryptocurrency,” Lodha said, as 74% of survey respondents said that they wanted more information on how crypto taxes work from the exchanges they use.
  • Instead, it’s more about the complexity inherent in crypto and some key differences from savings and investment scenarios most taxpayers are familiar with. Your bank might have given your grandparents a toaster, but airdropping tokens isn’t covered by the regulations that governed that kind of marketing gimmick.

Washington has a crypto tax agenda. As part of Biden’s 2021 infrastructure bill, IRS crypto reporting requirements in 2023 are going to be easier for crypto investors and harder for crypto firms.

  • Under the new requirements, crypto exchanges, custodians and other services must follow existing broker information reporting rules, which means that they must issue Form 1099-B annually, which details all transactions conducted.
  • Biden is also eyeing crypto taxes as a way to bridge the budget gap in his new budget proposal, which means that there might be clearer rules down the line, as the budget “seeks to modernize rules for reporting on digital assets,” according to Ernst and Young.
  • Some members of Congress have also drafted crypto-friendlier tax bills, such as the Virtual Currency Tax Fairness Act, which would exempt small transactions from being taxed. The tax-fairness proposal has already garnered bipartisan support.

Since crypto is growing, crypto tax advice and compliance are growth fields, too. As a relatively new sector, cryptocurrencies are likely to be met with waves of new regulation and legislation, as the government tries to figure out how — or even whether — digital assets fit into the existing tax system. It’s a good idea to get a handle on what you’re on the hook for now, before it changes once again.

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