In the past few years, increase in the use of cryptocurrency has skyrocketed. Last November, the issuance of digital assets from private entities reached a market capitalization of $3 trillion. Just five years earlier, that capitalization was $14 billion.
All this activity has led to questions about the tax treatment of these digital assets. For tax purposes, you should know, virtual currencies are treated as property. And while this generic rule tries to simplify the matter, it fails to answer potential issues. For instance, what are the tax consequences of earning passive income through trading cryptocurrency? How are taxpayers treated when one uses cryptocurrency to buy non-fungible tokens on the blockchain?
Cryptocurrency experts believe America’s digital asset sector needs more regulation to protect the economy and investors. On March 9, President Biden took steps to do just that, signing an executive order to better regulate virtual currency. The order expects the Treasury Department and other government agencies to publish digital asset reports that prioritize the effects digital assets have on the U.S. financial system and economy. Additionally, the Infrastructure Investment and Jobs Act will require the issuance of Forms 1099-B to detail cryptocurrency exchanges. Plus, the Treasury Department’s 2023 revenue proposals want to require certain taxpayers to report foreign digital asset accounts in order to avoid tax evasion.
Clearly, with the matter in a state of constant flux, staying educated on current tax news regarding cryptocurrency will help prepare taxpayers for this and upcoming tax seasons.
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