Washington, D.C. — Cryptocurrency advocates claim that cryptocurrency is unique and not subject to laws, including tax laws, that apply to other assets. With taxpayers preparing to file their 2023 tax returns, a new Center for American Progress report explains that existing tax laws apply to digital assets just like any other assets.
Many people have been lured by the exaggerated promises of cryptocurrency, and many have lost much of their life savings from investing in these highly volatile digital assets, worsening inequities 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 outlines how the U.S. Treasury Department and the IRS should continue to educate taxpayers about the application of tax laws to cryptocurrency transactions and to issue guidance in the few areas where there may be uncertainty. The report also calls on Congress to avoid confusing consumers with proposed legislation unless truly needed.
The report identifies ways Congress, the Treasury Department, and the IRS can ensure that lack of compliance with the tax laws by those who engage in digital asset transactions does not undermine the tax system, including:
- Clarifying broker and other information reporting: While cryptocurrency brokers have leaned into the anonymity of transactions on the block chain, the Treasury Department and IRS have the authority to determine whether a digital asset is reportable or not and should use that authority to clarify reporting rules that apply to cryptocurrency.
- Closing loopholes: Congress and the IRS should take action to close the wash sales and constructive sales loopholes to prevent tax avoidance.
- Clarifying when so-called hard forks and airdrops give rise to taxable income: These transactions are unique to digital assets but give rise to income in much the same manner as transactions involving assets do.
- Modernizing rules for loans of cryptocurrency securities: Rules defining when gains and losses must be realized when securities are loaned among investors should be updated to ensure that loans of digital asset securities are treated comparably to loans of other securities.
“Much of the uncertainty surrounding the tax treatment of cryptocurrency stems from the industry’s resistance to long-standing laws and regulations designed to protect consumers and maintain financial market fairness and stability. Allowing exceptions from these rules for cryptocurrency—an unproven and highly volatile type of asset—would put consumers and our financial markets in danger,” said Alexandra Thornton, senior 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 on the scales by tax policymakers—incentivizing greater investment in cryptocurrency and diverting capital away from much-needed investments in the real economy,” said Jean Ross, senior fellow at CAP and co-author of the report. “The Treasury Department and the IRS should act swiftly to issue guidance where needed to clarify the application of existing laws governing income recognition and reporting to the cryptocurrency industry and cryptocurrency transactions.”
Read the report: “Cryptocurrency Income Is Taxable Income” by Alexandra Thornton and Jean Ross
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