U.S. Treasury Secretary Janet Yellen says tax filings for cryptocurrency transactions should be treated just like stocks and bonds, without clarifying the specific actions the agency will take.
“Taxpayers should receive the same type of tax reporting on digital asset transactions that they receive for transactions in stocks and bonds so that they have the information they need to report their income to the IRS,” Yellen said Thursday at the American University in Washington.
In a speech, Yellen outlined a set of broad principles and guidelines — rather than specific instructions — in response to President Joe
“It’s illegal to evade taxes, launder money or avoid sanctions. It doesn’t matter whether you’re using checks, wires or cryptocurrency,” Yellen said.
Yellen pledged to design regulatory frameworks to “support responsible innovation while managing risks.” But a lack of clarity in crypto tax filing will pose challenges to investors as well as their financial advisors.
Only 3% of U.S. cryptocurrency investors had filed their taxes at the end of March. By comparison, Americans overall have filed about 40% of individual returns expected this tax season, according to a survey by digital asset platform
“A lot of people don't even know where to begin.” said Sean Waters, vice president of HeightZero, a digital asset management firm for advisors. “It's not that they're trying to incorrectly report the taxes. They just don't know what exactly may be subject to a particular transaction, and different rules might apply to different blockchains when they file taxes with the IRS.”
When given a list of hypothetical tax scenarios, 97% got at least one wrong, showing many do not realize they need to, for example, pay taxes when trading one type of cryptocurrency for another or when using cryptocurrency to buy a good or service, according to CoinTracker.
While an
“This (regulation concern) is something we've repeatedly heard firsthand from the dozens of RIAs that work with Flourish Crypto," said Ben Cruikshank, the head of Flourish, an RIA platform that recently
While Yellen says crypto tax filing should have the same treatment as stocks and bonds from the IRS, she doesn’t specify whether cryptocurrencies will be subject to the wash sale rule — an IRS regulation that prevents a taxpayer from taking a tax deduction for a security sold at a loss and then repurchasing within 30 days. As of now, there is no crypto wash sale rule in place. The IRS officially considers digital currency to be property rather than a security.
Crypto investors now could technically sell cryptocurrency at a loss and repurchase the same cryptocurrency without having to observe any waiting period between, and claim capital losses or gains on their taxes accordingly.
“You can actually utilize this to your advantage from a tax efficiency perspective,” Waters said.
In November 2021, the House Budget Committee introduced the Build Back Better Act, which includes a proposal to subject cryptocurrencies to the wash sale rule. If it were to become law, there would probably be rules to regulate crypto assets as a separate asset class, according to Lisa Zarlenga, a tax attorney with Steptoe & Johnson.
“I think if we could get greater clarity from both a regulation and from a taxation perspective, having clear steps on what people can and can't do, then you are going to see some of the mass adoption in the financial advisory world that we're hoping for. ” Waters said.
— With additional reporting from Bloomberg news.
