A heads up for crypto tax updates before the new year comes around
The tax reform proposals have flooded the cryptocurrency market with news, and we’ve picked a few key things from there you should be aware of as we move into 2022.
Will the Wash Sale Rule Apply to Crypto As Well?
The wash sale rule may apply to crypto transactions, but it has not been finalized yet as of December 2021. So we advise staying tuned with the news updates.
A “wash sale” occurs when you sell your stock at a loss and repurchase the same stock within 30 days before or after the sale. The loss may be used to offset your capital gains or up to $3,000 of ordinary income on your tax returns. However, wash sales are not allowed for stock trading, meaning you cannot claim a capital loss or get a deduction if you practiced a “wash sale.”- This is the wash sale rule.
Cryptocurrency is currently not subject to the wash sale rule. But the federal government may soon apply the wash sale rule to cryptocurrency transactions, which may occur retroactively as early as January 1, 2022.
Let’s see how it works with an example.
Steve bought 1 BTC at $60,000 and sold it at a loss for $50,000. To keep BTC in his portfolio, he re-bought 1 BTC for $51,000 the next day.
Let’s see how the wash sale rule applied to cryptocurrency.
Will the Exchanges Issue the 1099-B As Well?
Yes, but the 1099-B requirement will not be taking effect for transactions occurring before 2023.
Under the infrastructure bill, to prevent any possible cryptocurrency tax evasion, crypto exchanges are required to issue 1099-B forms in the future.
The 1099-B is a tax document that stock brokerages (e.g. Robinhood, TD Ameritrade) issue for tax purposes. It is easy for the stock brokerages to figure out their customers’ trades because the stock trading takes place on one platform.
However, cryptocurrency is a different story. Many crypto enthusiasts buy their cryptocurrency on one platform, and then they transfer their crypto to different exchanges and sell it there. This leaves us with a question of how a single exchange will figure out the cost basis on a different exchange where the client first bought their crypto.
Let’s show you a realistic scenario in the crypto trading world and how challenging it would be to issue a 1099-B from a crypto exchange.
1. Katie initially bought her SHIB (Shiba Inu Coin) on KuCoin.
2. After Coinbase added SHIB on its trading market, Katie transferred her SHIB there and cashed out some of it.
3. She then transferred the rest of her coins to Uniswap and swapped SHIB to UNI (Uniswap Coin).
There is still some room for updates from the federal government on this matter. We’ll keep you posted about any changes.
What’s Section 6050i, and What Does It Do?
Section 6050i requires people who receive more than $10,000 of cash in a business to file a report with the IRS. This report must include the amount of cash received and the payors’ names, addresses, and Social Security Numbers (SSNs). Transactions involving digital assets — including cryptocurrency — from 2023 will be subject to this reporting.
Let’s take a look at another example.
Kim bought LAND on Sandbox and paid Juan, the LAND owner, 5 ETH (approximately $20,000).
Under Section 6050i, Juan has to collect Kim’s full name, address, and even SSN and report them accordingly to the IRS.
As you can see, there may be lots of changes in crypto trading and tax requirements in 2022. We at Cointelli are here to help you get through these challenges and file your crypto taxes correctly. Please check out our homepage and see how your crypto tax reporting can be done so easily.
Got any crypto tax questions? Ask us on Twitter! Our co-founder & crypto tax expert Daniel @Cointelli_Dan will answer you directly!