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
“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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