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What’s new in U.S. crypto tax regulation? A guide to crypto’s changing rules and what they mean for you

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In the last few years, the IRS has stepped up crypto reporting with a front-and-center question about "virtual currency" on every U.S. tax return. If you're new to crypto, these rules may come as a surprise — but crypto holders have always been required to report income and capital gains made from their transactions. 

While the rules for individuals haven't changed, 2021 introduced some new laws that significantly changed reporting requirements for the institutions — banks, crypto exchanges, and more — that you trade your digital assets with.

So what, exactly, is changing? Let’s dive in.

First things first...

Coinbase doesn’t provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but it’s important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.

Changes to reporting for crypto brokers and businesses

Here’s the background: in November 2021, President Biden signed a wide-reaching bill into law called the Bipartisan Infrastructure Deal (or the Infrastructure Investment and Jobs Act). The bill was vast — so it’s possible you missed several changes that will impact crypto. If you did, don’t worry: now’s your time to catch up.

The changes under this bill won’t go into effect until January 1, 2023 and will apply to the 2023 tax year — but this may change. Before specific changes go into effect, the IRS is expected to release proposed and then final regulations to ensure institutions can take the necessary actions and updates to comply.

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The new infrastructure legislation categorizes digital assets, like Bitcoin, as “specified securities” subject to reporting on sales, like stocks and bonds. This matters because it changes how some institutions — referred to as “brokers” in the law — need to track and report their customers’ crypto activity. 

What makes the term "broker" confusing?

The term “broker” stirred up some confusion among the crypto community when the infrastructure bill was proposed, because it was unclear which people and organizations were included in this category. Some lawmakers introduced language into the congressional record, to try to clarify that the term “broker” was not meant to include individuals who mine or stake crypto, or wallet providers who don’t actually hold crypto or control their customers’ private keys. Regardless of that language, Coinbase is now considered a broker.

If you’ve used Robinhood, Fidelity, or other traditional brokers to buy and sell stocks, you’ve probably seen some kind of 1099 form (1099-B and 1099-DIV, for example) to report interest, dividends, or capital gains. Your broker is required by law to send this form to the IRS, along with your cost basis (on 1099-B) — the 1099 you receive is simply your copy. This layer of reporting helps the IRS tax you accurately on money you’ve made, as the laws apply. 

Currently, when you buy or sell crypto using your Coinbase app, Coinbase doesn’t have to report the proceeds or cost basis from sales, or any other dispositions (like converting or spending crypto) to the IRS. This is set to change starting January 2023, when all crypto platforms and exchanges that fall under the definition of “broker” will be required to start reporting your sales (and other dispositions), just like a traditional broker would. 

Also part of new tax laws: crypto brokers will need to report your cost basis to the IRS. If you transfer crypto to another broker, your cost basis will be moved, too. If your shares are moved to a self-custody wallet or somewhere other than a broker, your transfer details and original cost basis will still be sent to the IRS at the end of the year. All this is to help ensure the government has information to determine the amount of taxable gain as a result of sales transactions.  

In addition, you will have to complete and sign the IRS Form W-9 (or Request for Taxpayer Identification Number) and provide it to your broker so they can report your crypto sales to the IRS.

This added requirement ensures the IRS is appropriately taxing the right taxpayer. Penalties are high for not providing an IRS Form W-9, including backup withholding.

Changes to transaction reporting

Passed by Congress in 1970, The Bank Secrecy Act (or BSA) was one of the first attempts at fighting money laundering in the U.S. The act requires financial institutions, businesses, and individuals to report cash transactions of $10,000 or more to the Financial Crimes Enforcement Network Division (FinCen) of the U.S. Treasury (with some exceptions, like gifts). These rules now apply to crypto.

Starting in 2024, people engaged in “trade or business” in the United States will need to collect information about purchases over $10,000 using digital assets and to report these transactions to the U.S. Treasury, similarly to how they currently must report cash transactions over $10,000.