Something important to remember about the much-parsed crypto language in the $3.5-trillion infrastructure bill, according to an EY tax expert: Any resulting tax reporting rules are unlikely to go into effect before 2025.
By the estimate of Debbie Pflieger, a principal at EY, getting the infrastructure bill approved before the end of 2021 would kick off a year-long process during which the Department of Treasury decides how to implement the new rules and issues preliminary guidance, perhaps in 2022.
Then comes a period of accepting comments from the industry, final guidance and what could be an 18-month grace period before any actual reporting begins.
Even so, hardly a day goes by that she doesn’t get a call from a client wondering how digital assets will impact their taxes.
Why all the fuss? Pflieger, who has been at EY since 2005, chalks a lot of it up to inexperience.
“This is 2021, so we’re talking three or four years from now,” Pflieger told Crypto Investor. “[Crypto firms] barely existed three or four years ago. So they don't have the experience, necessarily, that brick and mortar firms and those of us who've been doing this for a long time have in this space. So to them, yeah, they think everything happens immediately because that's the way digital assets are developed and expand and grow.”
While Pflieger thinks traditional firms have an advantage from having collected tax information from clients for years, she did say they’ve struggled to keep track of digital-assets. That’s especially true given the number of exchanges involved.
“If [a client] transfers stock from one broker to another, under the existing rules, the broker she transferred from gives the new broker her basis information so that they can do that reporting when she ultimately sells that stock,” Pflieger said. “When you're dealing with cryptocurrency, you don't have that because of the way the currency is recorded in the blockchain. One broker doesn't necessarily know where the cryptocurrency goes when it leaves their custody.”
As for the crypto native firms that haven’t done this sort of thing before, Pflieger has had to talk them through ways to collect tax information in a way that’s compliant without adding too much friction. If they don’t, the potential penalties could be significant.
The IRS fines firms $290 for missing 1099s, the form sent to each client that tallies their miscellaneous income for the year. Total fines for that max out at $4 million, no matter how many 1099s forms are missing.
“You can have that penalty be abated for reasonable cause. And given the lack of guidance, I feel really good right now that nobody’s going to be penalized for failing to report,” Pflieger said. “But then you’ve got this backup withholding issue.”
Under the backup withholding rule, if the IRS determines you should have reported something, and you didn’t, you’re liable for 24% of the gross proceeds from that trade.
“That is a strict liability,” she said.
Something important to remember about the much-parsed crypto language in the $3.5-trillion infrastructure bill, according to an EY tax expert: Any resulting tax reporting rules are unlikely to go into effect before 2025. Subscribe for full article
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