Crypto investors must embrace new tax rules or risk falling behind
Crypto’s Wild West era is over — it’s time to embrace regulation to secure the future of digital assets
Jimmy Rooney/Shutterstock modified by Blockworks
Last month, the US Treasury Department finalized new tax rules for the crypto industry.
We should embrace them.
Crypto users, attracted to the digital asset space because of its libertarian values and independence from the traditional financial system, may chafe at this larger IRS crackdown as burdensome or troubling. However, the time for scams and cons is over.
The market has operated in a fog of ambiguity for too long. The SEC’s regulation by enforcement kills innovation on the business side and leaves investors uncertain about tax obligations and financial planning.
Almost a century ago, US Supreme Court Justice Oliver Wendell Holmes delivered his now-famous phrase: “Taxes are the price we pay for a civilized society.” Embracing this principle, it is time for us to build real businesses and bring much-needed clarity, legitimacy, and stability to the space.
Users who fail to adapt are risking the erosion of institutional trust in Web3 and will likely incur severe financial penalties and audits.
A new reality
Platforms such as Coinbase and Binance will now be legally required to report users’ proceeds from sales to the IRS. Meanwhile, market participants have the responsibility of tracking their tax information. This change necessitates a more formal approach to tax, wealth, and estate planning for their crypto holdings.
While I am as troubled by our broken financial system as any Bitcoin believer, it is time we got our act together to improve our credibility, attract more investors, and drive more growth.
The continued development of the digital asset space is a net positive because it provides rails for new market participants to onboard. Existing participants who continue to snub the traditional financial system do so at their own risk and now face severe financial penalties and audits.
While stablecoins and NFTs are largely excluded from the new IRS tax regime, crypto tax evasion cases are on the rise. Investigations range from failures to report capital gains and withholdings of ownership disclosures. Because the IRS treats crypto as property, estates may pay up to 40% in estate taxes when transferring assets to heirs.
Every emerging industry goes through a series of growth phases, from wild experimentation to eventual regulation and integration into the broader financial ecosystem. The crypto industry is no exception. Its initial phase was marked by rapid innovation and wealth creation, but also by significant volatility and a lack of regulatory oversight.
Over the past 12 months, we have seen landmark decisions in favor of the crypto industry in the judicial system. Some of the world’s largest asset managers launched bitcoin ETFs. Digital assets have become a focus in the US presidential race. Most recently, we have the IRS ruling on tax reporting for custodial assets.
Institutional adoption begets regulation. Now, retail investors need to plan ahead.
How to plan ahead
While institutional adoption and regulation are reshaping the crypto landscape, retail investors must also adapt to this new reality. With the IRS’s new mandate, tracking tax lots will become an essential part of managing crypto investments. Retail investors need to be proactive in understanding the implications of these regulations and seeking solutions to navigate and optimize in this complex environment.
Retail crypto investors should review their entire crypto transaction history to assign a cost basis to each of their wallets, ideally with a tax adviser’s help. Otherwise, the IRS may deem the cost basis $0, resulting in higher capital gains taxes.
This ruling clarifies how the IRS will participate in the crypto industry. All investors should assign a cost basis to their wallets. Those with considerable wealth may benefit from taking additional steps for asset protection, similar to traditional finance practices.
Natural first steps include establishing a will and using trusts to optimize estate settlement. Financial vehicles like retirement accounts and life insurance can also shield crypto assets in tax-advantaged structures.
The financial risks are real. The crackdown on crypto tax evasion is expected to bring in $28 billion over the next decade. The IRS has appointed two crypto executives for compliance and enforcement. We’re already seeing the fruits of this effort. Back in March, an Austin man faced the first criminal charges for crypto tax fraud.
While many federal agencies continue to prove they do not have a handle on cryptocurrency, some like the IRS are catching up. Figures like Sam Bankman-Fried are being replaced by Larry Fink. Proactive planning can safeguard your crypto holdings and grow your family’s wealth. Investors who choose to put their head in the sand and ignore the changing landscape do so at their own peril.
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