Digital asset proposal puts spotlight on crypto taxes

Financial advisers probably should remind their clients they need to pay taxes when they sell cryptocurrencies now that Congress is debating whether to strengthen reporting requirements.

A provision of a bipartisan $1 trillion infrastructure bill would bolster tax enforcement surrounding transactions involving digital assets, which include cryptocurrencies, non-fungible tokens and items like electronic baseball cards.

The measure seeks to ensure that details about digital transactions — such as purchase price, gains and losses — are reported to the IRS, much like that information for securities is captured on a Form 1099.

“It’s a good idea,” said Richard Pon, a CPA and financial adviser in San Francisco. “There’s clearly a lot of unreported income in digital assets. A lot of people don’t know when these transactions occur.”

Buying and selling cryptocurrencies can be a complicated process, which makes tracking it for tax purposes challenging. Daniel Morris, a senior partner at the CPA firm Morris & D’Angelo, said a client never received a 1099-K for a $480,000 sale of cryptocurrency that required 75,000 transactions.

“It’s too easy for people to forget that these are taxable transactions,” Morris said.

Even if people investing in cryptocurrencies are keeping good records, they could still get tripped up when it comes to taxes, said Annette Nellen, a professor of accounting and taxation at San Jose State University.

“They might not fully understand the tax considerations such as if they acquired one virtual currency using bitcoin and did not report the gain or loss on that bitcoin at the time of the exchange,” Nellen said. “Investors acting almost like day traders are hopefully using one of several software programs to help with the tracking of sales and basis so they are doing their best to be compliant.”

The digital asset provision may not directly affect investment advisers and brokers because they don’t hold inventories of cryptocurrencies. It will impact cypto exchanges like Coinbase, which did not respond to a request for comment.

The digital-asset provision has been included in the infrastructure bill as a way to help pay for the package, which would upgrade the nation’s roads, bridges, water systems and broadband access. The Senate is debating the bill this week.

An amendment offered Wednesday by Sens. Ron Wyden, D-Ore., Patrick Toomey, R-Pa., and Cynthia Loomis, R-Wyo., would clarify that the information reporting requirement only pertains to brokers who buy, sell and trade digital assets on exchanges not to people who mine the assets.

“Investors failing to pay tax they owe through cryptocurrency is a real problem, and I strongly support third-party reporting by exchanges where cryptocurrency is bought, sold and traded,” Wyden, chairman of the Senate Finance Committee, said in a statement. “Our amendment makes clear that reporting does not apply to individuals developing blockchain technology and wallets.”  

Although most financial advisers don’t execute crypto transactions, they have a role in educating their clients about their tax implications, Pon said. Advisers, as well as accountants and others helping clients, should ask them about their digital assets.

“All of us in the ecosystem need to make sure people understand that there’s a compliance requirement,” Morris said. “You have to report your transactions and recognize your gains and your losses.”

[More: Crypto losses tax: Crypto investors had their funds frozen. Now they may have to pay taxes]

But it’s difficult to determine the cost basis of a digital asset sale or purchase.

“The IRS needs to give us binding guidance on basis,” Nellen said.