While most people are feeling a sense of relief that another tax season is behind us, cryptocurrency enthusiasts remain frustrated that 2018 has come and gone without meaningful reform to crypto tax laws.
Since cryptocurrencies began gaining traction in 2017, the tax implications of these new, borderless currencies have been challenging to understand.
Currently, nearly 10% of the U.S. population owns digital currency, which means that millions of people are either struggling to understand the responsibilities accompanying the investments or they are grappling with the implications of tax laws that feel, at best, inapplicable.
This sentiment is shared by the MIT Technology Review, which, in the days preceding the tax deadline, published the prescient headline “How the Hell Are Cryptocurrency Holders Supposed to File Their Taxes.” The difficulty has even created an unfamiliar harmony in Washington as members of the bipartisan Congressional Blockchain Caucus recently sent a letter to the IRS requesting clarity to the opaque taxation laws surrounding cryptocurrency.
In short, crypto taxes continue to be a mess, and significant overhaul is still required, but several things are preventing the necessary next steps.
Here are just a few problems plaguing crypto taxes and the possible solutions going forward.
#1 Accounting is Complicated
Naturally, the expansive crypto ecosystem can be difficult to track, and users can be forgiven for having a difficult time managing their myriad of tokens. Therefore, cryptocurrency portfolio tracking needs to become an industry norm.
Users also need to find ways to cope with their tokens being spread over multiple platforms. Many users are adopting smart tools, such as Blox’s crypto accounting software which does away with the intricacies of tracking a crypto portfolio, by combining assets into a single screen while providing insights into the appreciation or depreciation of their tokens.
Not only can this assist users as they navigate their different currencies, but it can help them best develop the records they need to account for their holdings. Most importantly, the right software solution produces auditable reports that a CPAs can use to legally and accurately prepare cryptocurrency taxes. By professionalizing the tax process, crypto users and the governments they report to can more accurately and effectively navigate this new asset class.
#2 Crypto is Nuanced, but Laws are Stringent
Currently, the crypto tax standard is broad and expansive, failing to account for the nuance and differentiation among different digital currencies.
According to the IRS Notice 2014-21, all digital currencies are considered property, and holders must pay taxes on any value appreciation of their assets. As the IRS reminded taxpayers in a news release, failing to report digital assets can result in an audit that would subject traders to fines, interest payments, and even jail time.
However, this approach doesn’t take into consideration the diverse crypto ecosystem that’s emerged since Bitcoin first burst onto the scene in 2009. For instance, some digital tokens are intended to function as a form of usable currency in a global, digital environment. Meanwhile, utility tokens are created to facilitate an activity on blockchain platforms.
While both of these tokens can rise and fall in value, they are fundamentally different assets that deserve unique tax requirements.
Of course, there are many more variations of cryptocurrencies, and the tax laws need to be as particular as the assets that they’re taxing.
#3 Reporting is Sparse
Like many people facing a complicated situation, many crypto holders are choosing not to report their tokens rather than face taxation by an immature financial system.
While not hard data, a recent Twitter poll found that 80% of respondents stated that there is “not a chance” that they would report their cryptocurrencies on their taxes. In many ways, it’s hard to blame these respondents. When they first purchased their digital tokens, many crypto users never dreamt of their ultimate gain, and it’s evident that the tax system wasn’t either.
Before crypto reporting becomes widespread and reliable, authorities will need to demonstrate that they are taking the issue seriously by revising current standards to make them more equitable and representative of the actual market.
This year’s tax season is over. It’s time to get to work making the system work better for next year’s deadline.