President Joe Biden signed a $1.2 trillion bipartisan infrastructure bill on Nov. 15 — and it includes some new legislation crypto investors should know about.
The new law will require brokers — aka cryptocurrency exchanges — to issue a 1099-B. In other words, crypto exchanges will now be required to notify the IRS directly of crypto transactions. “The bill will signify the end of hiding many gains for many crypto investors,” says Grant Maddox, an independent CFP based in South Carolina.
This will in turn create tax reporting challenges for many crypto investors, Maddox says. For investors who use their own crypto wallet, the information reported to the IRS on the 1099 form will be prone to inaccuracy since the exchanges reporting on trading activity will have a limited view into what these investors paid for crypto in the first place.
Before You Invest In Crypto
Experts say it’s smart to keep your crypto investments under 5% of your overall portfolio. Crypto prices fluctuate wildly by the day, and experts also say you’d be smart not to invest more than you’d be OK losing if the market dropped out altogether. Crypto investments should also never get in the way of other financial priorities like saving for emergencies, paying off high-interest debt, and saving for retirement using more conventional investment strategies.
What Should Investors Do In Response to the New Law?
For crypto investors looking to stay on the right side of the new law pertaining to their investments, there are two big things to keep in mind:
- Keep track of your cost basis — what you originally paid for your crypto — as accurately as possible, to reconcile with what the exchanges will be reporting to the IRS.
- Finding a crypto-knowledgeable tax professional could be even more helpful in accurately reporting your crypto investments. Be as transparent as possible with regard to what cryptocurrency you hold and what you paid for it.
While the IRS considered cryptocurrency taxable property before the new legislation, the defined reporting requirements raise the stakes for investors to make sure they are reporting their activity accurately and completely.
“I think a lot of folks are in for a big tax surprise,” Maddox says. “[The IRS is] going to be tracking this information, and there’s no avoiding the tax consequences and gains now.”
What Does the New Legislation Mean for the Price of Bitcoin and Ethereum?
In the hours after Biden signed the new infrastructure bill into law, Bitcoin and Ethereum saw big drops in price, after both had set multiple new all-time highs in recent days. Bitcoin dropped below $59,000 overnight, and Ethereum dropped below $4,200. Both had climbed back up modestly by Wednesday.
Cryptocurrency is notoriously volatile, prone to big price swings by the day and even the hour. While experts recommend crypto investors stick to the relatively more established Bitcoin and Ethereum, even these biggest two cryptocurrencies commonly see big ups and downs.
Since cryptocurrency is such a new asset class, experts say it is more susceptible to influence by anything from a celebrity tweeting about a given crypto to new government regulations that impact it as an investment class.