A provision of the $1 trillion federal infrastructure bill would tighten
the rules of how cryptocurrency transactions are reported, potentially
prompting investors to rethink how and where they store their digital assets.
If you’re integrating crypto into your portfolio and want to mitigate your tax
liabilities, it may be helpful to work with a financial advisor.
Infrastructure Bill and Its Impact on Crypto
To help pay for $550 billion in new spending on roads, bridges, water
systems and electrical grids, the bipartisan infrastructure bill requires all
cryptocurrency “brokers” to report specific information, such as purchase and
sale prices, about transactions of $10,000 or more.
The proposal does not amount to a new tax, but it would bolster tax
collection by requiring exchanges to file 1099-B forms (some platforms
currently send investors 1099-K forms, which do not account for the cost basis
of transactions). The government estimates the proposal will generate $28
billion in revenue over the next 10 years.
The initial version of the infrastructure bill riled up many in the
cryptocurrency industry for its broad definition of a broker as “any person who
(for consideration) is responsible for regularly providing any service
effectuating transfers of digital assets on behalf of another person.” Critics
said the definition was overly broad, would stifle innovation and force parts
of the industry, like software developers, overseas.
U.S. Sens. Ron Wyden (D-Ore.), Pat Toomey (R-Pa.) and Cynthia Lummis
(R-Wyo.) have since filed an amendment clarifying that software developers and
miners are not considered brokers and do not have to report transactions to the
IRS.
But the consideration of crypto in the infrastructure bill has those
investing in Bitcoin, Doge, Ether, XRP and other digital currencies
questioning how they will be affected and how they might safeguard their assets
from the tax man.
Cryptocurrencies and Tax-Advantaged Retirement Accounts
Some experts say the proposed changes in the infrastructure bill could
lead to an influx of crypto assets into tax-advantaged retirement accounts,
like IRAs and 401(k)s.
“While utilizing tax-deferred accounts to hold crypto is not new, the government’s focus on taxes could accelerate their use by investors interested in digital assets,” said James Vermillion, a financial advisor and founder of Vermillion Private Wealth in Lexington, Kentucky.
Isaiah Douglass, a certified financial planner and partner at Vincere
Wealth Management in Indianapolis, said Roth IRAs are optimal for investors who
wish to hold cryptocurrencies like Bitcoin in their retirement accounts. While
a traditional IRA defers taxes, Uncle Sam will eventually come calling when required
minimum distributions (RMDs) are taken. By paying taxes up front with a Roth
IRA, investors can potentially capitalize on future growth of digital assets
tax-free.
“If you see Bitcoin adoption across the globe, it’d be ideal for sheltering those large gains in a Roth IRA,” Douglass said.
As digital assets mature, Vermillion said investors will have more
choices for where their crypto IRAs are held.
“Generally speaking, I like the idea of investors using tax-deferred accounts if they are considering digital assets, because it helps improve investor behavior,” he said. “Investors tend to be more patient with investments held in retirement accounts. Patience is essential for a volatile asset class like crypto.”
Ways to Mitigate Crypto Taxes Beyond Retirement Accounts
But not all experts recommend holding cryptocurrency within your
retirement plan. Tyrone Ross, CEO of OnRamp Invest in Woodbridge, New Jersey,
said cryptocurrency is too dynamic to confine within an IRA or 401(k).
“I’m a crypto purist,” said Ross, whose company offers crypto asset management technology for financial advisors. “I think taking an asset that trades 24/7, 365, is highly liquid with all of its amazing properties, putting it inside a retirement account and locking it up doesn’t make sense.”
He said crypto investors looking to reduce their tax liability have
alternatives to selling. These include borrowing against their position or
opening an interest-bearing account on platforms like BlockFi, which will pay
an investor up to 7.5% APY for storing their Bitcoin.
As for the tax reporting provision attached to the infrastructure bill,
Ross said he doesn’t think it will immensely change the behavior of investors.
“[Investors] aren’t trying to avoid paying taxes or being tracked,” he said. “Most people transacting in the crypto space are doing it because it’s just better.”
Meanwhile, Douglass said investors shouldn’t rush to change where they
hold their crypto assets, although self-custody is the best practice for
security.
“Let the dust settle, and then make a plan based on the actual legislation,” he said.
The Bottom Line
The cryptocurrency provision in the infrastructure bill is designed to
boost tax collection from transactions of over $10,000. If you’re a crypto
investor who has paid your taxes properly, the change likely won’t impact you
negatively. However, the focus on crypto taxes may lead some investors to consider
holding Bitcoin and other currencies in their retirement accounts, including
Roth IRAs.
Tips for Investing
- Whether you want to invest in cryptocurrency, stocks or bonds, a
financial advisor can help you design an asset allocation and then manage
your investments for you. SmartAsset’s free tool can match you with up to three
advisors in your area in just five minutes. If you’re ready to find a local
advisor, get started now.
- Whenever you’re preparing to sell an investment, remember to consider your future tax liability. Profits from an asset that was held for under a year are taxed as normal income, while proceeds from an asset held for more than a year are subject to long-term capital gains rates. Use our capital gains tax calculator to find out what your tax bill will look like.
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