Hot on the heels of an executive order tasking federal agencies to collaborate on a coherent crypto strategy, the Biden Administration has issued a proposed budget that anticipates taxes on digital assets will need to rise by $5 billion this year — and by up to $11 billion over the next decade.
The latest projections also indicate that the Justice Department will require another $52 million to build up capabilities in the field of blockchain investigation — including more agents to track illicit transactions and counter crypto-funded ransomware attacks.
The proposals are sure to raise howls of protest in the crypto community, likely centered around an update of the IRS’ “mark-to-market” rules to include digital assets, potentially forcing cryptocurrency holders to pay tax on unrealized gains.
Markedly Worse
The problem with mark-to-market is that it assumes gains made on the value of crypto at the end of the year have a certain stability that the price-volatile crypto market is lacking.
Look at Bitcoin: The price on Dec. 31 was about $46,306 — close to its value on March 29, 2022. That’s about $20,000 below its price just on Nov. 9 and about 50% above where it was in mid-July, when the price dipped below $30,000. So, on a mark-to-market basis, anyone who bought high was looking at a good write-off. So far, so good.
However, push the price collapse ahead six weeks into 2022, and people would owe taxes on gains of more than 100% — despite having seen those gains cut in half in little more than a month.
Beyond that, the proposed change would not lump digital assets together with either securities or commodities; rather, they would be in a third class for “actively traded” digital assets, as determined by the Treasury Department.
That third asset class, however, is something of a second-class citizen. While securities dealers are required to use mark-to-market, it may be elected by commodities dealers, and by traders in securities or commodities — which you’d choose to do if you have losses, but not gains.
“Notably,” the explanations section of the budget proposal for digital assets said, “for financial accounting purposes, taxpayers may be required to mark inventory or trading positions to market, including at year-end.”
Reporting Compliance
The budget also calls for a new requirement that U.S. residents report digital assets worth more than $50,000. Calling tax compliance and enforcement “a rapidly growing problem” in the digital assets field, the proposal noted that its fairly easy for taxpayers to work with offshore exchanges and wallet providers.
“Requiring individuals specifically to report their offshore holdings of accounts with digital assets, subject to significant penalties if they fail to do so, is critical to combat the potential for digital assets to be used for tax avoidance,” the proposal said.
It would also allow U.S. authorities to exchange data about evidence of tax evasion with other governments, citing the need for reciprocity in maintaining relationships with foreign tax authorities.
“The United States has established a broad network of information exchange relationships with other jurisdictions … [that] has been central to recent successful IRS enforcement efforts against offshore tax evasion,” it said. “It has become clear that a jurisdiction’s willingness to share information on an automatic basis with the United States often depends on the United States’ willingness and ability to reciprocate by exchanging comparable information.”
Beyond that, the administration is calling for loans by crypto lending markets to be subject to the same loan nonrecognition rules as the securities market, in which loan transfers don’t create capital gains or losses.
While this doesn’t claim any specific revenue income, the proposal claims to reflect the rapid growth of a crypto lending market — which is a staple of decentralized finance — that barely existed before last year.
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