US Treasury Secretary Janet Yellen said tax returns for cryptocurrency transactions should be treated like stocks and bonds, without clarifying what specific actions the agency will take.
“Taxpayers should receive the same type of tax reporting on digital asset transactions that they receive for stock and bond transactions so that they have the information they need to report their income to the IRS,” Yellen said Thursday at the American University in Washington.
In a speech, Yellen outlined a set of general principles and guidelines — rather than specific instructions — in response to President Joe Biden executive order in March directing agencies to study cryptocurrencies and come up with whole-of-government approaches to regulating digital assets.
“It is illegal to evade taxes, launder money or avoid penalties. It doesn’t matter if you use checks, wire transfers or cryptocurrency,” Yellen said.
Yellen is committed to designing regulatory frameworks to “support responsible innovation while managing risk”. But a lack of clarity in crypto tax reporting will pose challenges for investors as well as their financial advisors.
Only 3% of US cryptocurrency investors had filed their taxes by the end of March. By comparison, Americans as a whole have filed about 40% of individual returns expected this tax season, according to a survey by the digital asset platform. CoinTracker,
“A lot of people don’t even know where to start.” said Sean Waters, vice president of HeightZero, a digital asset management company for advisors. “It’s not that they’re trying to report taxes incorrectly. They just don’t know exactly what a particular transaction may be, and different rules may apply to different blockchains when filing taxes with the IRS.
When given a list of hypothetical tax scenarios, 97% got at least one wrong, showing that many don’t realize that they have to, for example, pay taxes when trading some type of cryptocurrency. currency for another or when they use cryptocurrency to buy a good or service, according to CoinTracker.
While a a growing number of financial advisors expect to use cryptocurrency As a client-driven investment, lack of regulatory clarity will be one of the top three barriers to widespread adoption, according to a McKinsey report released earlier this month.
“This (regulatory concern) is something we’ve heard repeatedly firsthand from the dozens of RIAs that work with Flourish Crypto,” said Ben Cruikshank, head of Flourish, an RIA platform that has recently launched Flourish Cryptoa cryptocurrency investment platform.
Although Yellen argues that filing cryptocurrency tax returns should have the same treatment as IRS stocks and bonds, she does not specify whether cryptocurrencies will be subject to the wash sale rule – a IRS regulation that prevents a taxpayer from taking a tax deduction for a security. sold at a loss and then bought back within 30 days. As of now, there is no crypto wash sale rule in place. The IRS officially views digital currency as property rather than security.
Crypto investors could now technically sell the cryptocurrency at a loss and redeem the same cryptocurrency without having to observe a waiting period in between, and claim capital losses or capital gains on their taxes as a result.
“You can actually use this to your advantage from a tax efficiency standpoint,” Waters said.
In November 2021, the House Budget Committee introduced the Build Back Better Act, which includes a proposal to subject cryptocurrencies to the wash sale rule. If this were to become law, there would likely be rules to regulate crypto assets as a separate asset class, according to Lisa Zarlenga, tax attorney at Steptoe & Johnson.
“I think if we could get more clarity from both a regulatory and tax perspective, having clear steps on what people can and can’t do, then you’re going to see some of the ‘mass adoption in the financial advisory world we’re hoping for,’” Waters said.
– With additional reporting from Bloomberg news.