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In November 2021, U.S. President Joe Biden signed into law a 1.2 trillion infrastructure bill with many nuances. One of the features was a new law that impacted cryptocurrency exchanges. The new law requires that cryptocurrency exchanges will now have to issue a 1099 B. The document that will be required shows the IRS any trading activity that took place during a specific year. The upshot is that the new law will signify the end of the hiding of any gains for crypto investors. The new law in the cryptocurrency market will likely impact bitcoin and other cryptocurrencies such as Ether. Any tax selling strategies used in stock or commodity trading will also be used as investors try to manage their gains throughout an individual year.
What Is A 1099 B Form?
The 1099 B form is issued by a broker responsible for facilitating the trades you make in an account. If you sell stocks, bonds, or even commodities through a broker, you can expect that your broker will issue a 1099 B form to the IRS every year. In January of the following year, you and the government should receive a copy of the 1099 B form.
Usually, the 1099 B form will describe the securities sold and the date you bought and sold the securities. The form issued by your broker will also explain the cost of acquiring the security and the amount you received when you sold it. Lastly, your broker will also describe the taxes they withheld when you sold your securities.
Generally, the 1099 B form in the United States is used to help calculate capital gains taxes. These are taxes that are calculated differently than taxes on income. A capital gains tax is for profits made on investments that qualify for a capital gains rate. There are long-term capital gains tax rates and short-term capital gains tax rates. Some gains do not qualify and will fall into a bucket where the transaction is labeled income gains. In this case, you will be taxed at the ordinary income rate. You will need to hold your cryptocurrency for at least 12 months to have the profits or losses categorized as long-term capital gains. Long-term capital gains rates are less than short-term capital gains rates.
How Should You Deal With The New Law?
Two issues need to be addressed by investors that have cryptocurrency accounts. First, you must try to keep track of your cost basis. For cryptocurrency trading, you need to know how much you paid for each trade. You might not be able to rely on your broker to determine the cost of each transaction. You will also need to find a knowledgeable accountant that will be able to file your crypto taxes correctly. Investors should understand that the new law will go into effect in the 2023 tax year. Your broker will not be required to issue a 1099 B in 2021 and 2022.
It would help if you tried keeping records of your bitcoin transactions. You want to know exactly how much you paid for each trade. If you have multiple purchases, you might need to calculate an average cost basis when you make a qualified sale of your bitcoin. For example, if you paid $20,000 and $22,000 for two trades and then made a sale at $25,000, your cost basis might be the average of the purchases at $20,000 and $22,000.
You might have to fill out several forms which log the purchases and sales of your transaction. Finding software that allows you to enter these trades automatically might be helpful. Some of the documents you might have to fill out include the 8949 form for every purchase and sale of bitcoin. You need to summarize these purchases and sales in your Schedule D form. If you receive bitcoin from mining, you must fill out a schedule C to report it as income.
How Will The Tax Change Impact Bitcoin?
The new law could impact bitcoin, especially when tax selling takes place in November and December. Bitcoin can be volatile and can experience huge swings. Bitcoin in 2022 hit a high near 60,000 and a low below 20,000. The influence of the new crypto tax law can impact the seasonality of the changes of the swings in bitcoin as the law comes into effect.
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How Will This Impact Cryptocurrency Purchases?
If you purchase a good or service with bitcoin, you will experience a taxable event at the time of the transaction. The purchase of an item will count as a sale of cryptocurrency, and the value of bitcoin will determine the sale price at the time of the transaction. You will need to remember the cost of the bitcoin (when it was purchased), similar to how it would be handled if you were crypto trading. The difference between the price when you bought your bitcoin and the price of bitcoin when you made the purchase will determine the tax liability. If the transaction took place more than one year before the purchase, your tax liability might qualify for long-term capital gains.
The Bottom Line
The nuances of trading bitcoin through a broker will dramatically change in 2023. Any broker in the United States that offers bitcoin will need to produce a 1099 B form and send that form to both you and the IRS. You will no longer be able to hide any transaction using bitcoin.
The new law will show every trade and the details of the transaction. That transaction will count as a sale when you use bitcoin for payment. You must keep track of all of your bitcoin transactions so you can show your cost basis. The process will become more arduous for those who will be paid their salaries in bitcoin. You will need to know the dollar value each time bitcoin is added to your account. Bitcoin could also experience tax selling during the end of the year as investors try to offset gains with losses.
Note that all the above content is solely intended for informative purposes and not to be taken as tax or trading advice. Any concerns dealing with crypto taxes and/or crypto trading and transactions should be taken up with a certified tax adviser/consultant.
