Washington, DC โ Cryptocurrency advocates say they are unique and not subject to laws, including tax laws, that apply to other assets. As taxpayers prepare to file their 2023 tax returns, a new Center for American Progress report explains that existing tax laws apply to digital assets like any other asset.
Many people have been attracted to the exaggerated promises of cryptocurrencies, and many have lost much of their life savings by investing in these highly volatile digital assets, worsening inequalities in financial markets and wealth accumulation. While the future of digital assets is uncertain, the application of tax laws to cryptocurrency transactions generally is not. This report describes how the U.S. Treasury Department and the IRS should continue to educate taxpayers about the application of tax laws to cryptocurrency transactions and issue guidance in the few areas where there may be uncertainty. The report also asks Congress to avoid confusing consumers with the proposed legislation unless truly necessary.
The report identifies ways that Congress, the Treasury Department, and the IRS can ensure that non-compliance with tax laws by those involved in digital asset transactions does not undermine the tax system, including:
- Explanatory corridor and other information reports: While Cryptocurrency brokers have relied on the anonymity of transactions on the blockchain, the Treasury Department and the IRS have the authority to determine whether a digital asset is reportable or not and should use that authority to clarify filing rules of reports that apply to cryptocurrencies.
- Close loopholes: Congress and the IRS should take action to close wash sales and constructive sales loopholes to prevent tax evasion.
- Clarifying when so-called hard forks and airdrops give rise to taxable income: These transactions are unique to digital assets, but generate income in the same way as transactions involving assets.
- Modernization rules for cryptocurrency securities lending: The rules defining when profits and losses must be realized when lending securities between investors should be updated to ensure that securities lending of digital assets is treated comparable to lending of other securities.
โMuch of the uncertainty surrounding the tax treatment of cryptocurrencies comes from the industry's resistance to long-standing laws and regulations designed to protect consumers and maintain financial market fairness and stability. โAllowing exceptions to these rules for cryptocurrencies, an unproven and highly volatile asset class, would endanger consumers and our financial markets,โ he said. Alexandra Thorntonsenior director of financial regulation at CAP and co-author of the report.
"Formalizing special treatment or creating new tax subsidies for digital assets would represent a hand in the balance by fiscal policymakers, incentivizing greater investment in cryptocurrencies and diverting capital from much-needed investments in the real economy," he said. John Ross, principal investigator at CAP and co-author of the report. โThe Treasury Department and the IRS should act quickly to issue guidance where necessary to clarify the application of existing laws governing revenue recognition and reporting to the cryptocurrency industry and cryptocurrency transactions.โ
Read the report: โCryptocurrency income is taxable incomeโby Alexandra Thornton and Jean Ross
For more information or to speak to an expert, Please contact Sarah Nadeau at snadeau@americanprogress.org.
