Crypto tax reporting is nothing new. In fact, the U.S. Internal Revenue Service (IRS) has been treating cryptocurrency as property since 2014 — which means that crypto capital gains ought to receive the same tax and accounting treatment as stocks or other properties. Furthermore, activities that involve digital assets and generate income are subject to income tax. So what’s the big hullabaloo about filing taxes for crypto in the current infrastructure bill?
As part of U.S. President Joe Biden’s vision, Congress has reached a bipartisan consensus for a $1.2 trillion infrastructure bill that seeks to construct a sustainable future for the country. Apart from the usual financing methods for the bill, such as selling 5G spectrums, Congress has sneaked a cryptocurrency tax into the bill.
Not Everything Taxable Fits in the Bill
By requiring crypto service providers to report taxes for transactions of more than $10,000, Congress aims to raise another $28 billion in tax revenue over the next decade.
As such, brokers and noncustodial services will be required to track crypto transactions and report their details to the authorities, which defeats the core functionalities of cryptocurrency — decentralization and autonomy.
You may also be wondering: How would crypto miners be taxed? Mining of crypto requires mining machines to solve complex mathematical equations, akin to actual miners putting in the hard work to obtain minerals. Moreover, crypto mining incurs a high volume of electricity and the ensuing cost. Would it be unfair to impose additional taxes on miners when they haven’t pocketed the cryptocurrency?
Fortunately, Senators Ron Wyden, Pat Toomey and Cynthia Lummis have come together in order to fend off the taxes for miners and developers.
After the impending crypto tax announcement, miners’ revenue dipped by $10 million intraday but rebounded to approximately $40 million. In the wake of China’s crackdown on crypto, mining difficulty was trending downward due to reduced competition. However, mining fees are estimated to increase — thus, adjusting for the cost of tax.
But here’s the kicker: Each crypto has its own tokenomics. Cryptocurrency is a concoction of cryptography, technology, miners, users and traditional finance. Each of the players in the ecosystem plays a vital role in stabilizing the incentive structure. More than just one or two layers of technology — and even industries — are intertwined.
Blanket taxation won’t kill a $2 trillion dollar industry, but hasty tax decisions will add confusion and impede the industry’s growth. So why the haste?
Here’s an insight from our R&D head, Shane: “The sheer size of the industry’s growth — especially in the proliferation of DeFi — means that it’s now ready for the regulatory limelight. These are unavoidable and growing pains of any new asset class. In fact, this cements crypto’s future position in the global financial order.”
As of the time of writing, MVRV ratio is climbing steadily to 2.24 — wiping up the losses from May’s crypto crash. The crypto industry is currently in the bullish phase, indicating unfazed demand for cryptocurrency despite the upcoming blanket tax.
Will Demand Meet Supply?
As economic theorists suggest — considering all things equal — the introduction of taxes increases the cost of providing and acquiring crypto-related services. However, market efficiency is practically a fallacy.
Pro tip: The amount of tax on long-term capital gains is generally more favorable than that on short-term capital gains. You can also lower capital gains tax though staking or yield-related financial products.
Disclaimer: The article serves as an educational piece and is not intended for investment advice. All investment and trading encompass direct and indirect risks, reader should consider their financial goals and risk tolerance before investing in any cryptocurrency.