Since the Tax Cuts and Jobs Act (TCJA) was introduced and signed into law under the presidency of Donald Trump in 2017, minimal further changes have been made to the tax code.
The main features of the TCJA were expanded compliance obligations for US controlled businesses operating overseas (controlled foreign corporations), alongside certain tax credits becoming greater, and the top income tax rate being reduced from 39.6% to 37%.
Whilst the IRS first regulations on the tax treatment of cryptocurrencies were introduced in 20141, few changes on their treatment were made after this.
Given the almost polar opposite political approach of current US president Joe Biden, it could have been expected that significant changes would be made.
5 Key Areas which are likely to change
- The top individual federal income tax rate would rise from 37% to the pre-Trump rate of 39.6%. This may have a significant effect on high earners in both Australia and New Zealand, which have a lower top tax rate, and as a result may prevent Foreign Tax Credits (from local tax paid) fully offsetting US tax which may apply. This is likely to result in a “top-up” of tax to be paid each year to the IRS.
- American corporations’ foreign income generally would be subject to a tax of 21%.
- The corporate rate would rise from 21% to 28%; a 15% minimum tax would apply to corporate book income.
- The step-up in basis on death and carried interest loopholes would be eliminated. As it currently stands, your “basis” in inherited property is the value as of the date of death of the owner. This means (using property as an example) if you were to sell an inherited house shortly after it was distributed as part of an estate, the capital gains tax would only apply on the difference between the sale price and the value on the date of death. By removing the “basis step-up”, the capital gain would be calculated back to the original purchase price of the property.
- Perhaps the most significant of changes will occur with regards to cryptocurrency:
Cryptocurrency As It Stands
Currently, when compared to other parts of the American financial system, cryptocurrencies are highly unregulated and also quite hidden from the tax system. Most US expats are more than familiar with the extensive and overarching FATCA legislation, which requires foreign banks to report the accounts and balances of their US citizen customers. None of this exists for cryptocurrencies.
Currently, a US citizen holder of cryptocurrencies requires only minimal reporting, which occurs when a cryptocurrency is sold, and then converted to “real currency”, be it USD or any other tradable currency. At this point, capital gain or loss is calculated based on the original purchase price of the cryptocurrency (in real currency), and its selling price. This is reported on Schedule D of a US tax return. Unrealised gains are not reported annually, as they are for other forms of investment.
It is possible, but also debatable whether cryptocurrencies should be reported on the FBAR (Form FinCEN 114). The FBAR is an abbreviation of Foreign Bank Account Reporting, and is also known as the Report of Foreign Bank Accounts. The FBAR has existed in with other names for more than two decades, however its reach was significantly extended as part of the FATCA legislation.
With non-US banks and financial institutions reporting the accounts and balances of US citizens to the Department of the Treasury, in addition US citizens are also required to report the same information to the Treasury using the FBAR form. This is administered as part of the Financial Crimes Enforcement unit of the Treasury, and the purported existence of the form is to combat money laundering. Its true role however has become more associated with tax.
The issue with regards to cryptocurrencies and the FBAR are twofold:
- Is cryptocurrency foreign? The most widely traded cryptocurrencies such as Bitcoin have no national affiliation, and therefore do not necessarily fit into the bracket of domestic or foreign from a US perspective
- Financial Account, whether cryptocurrencies constitute a financial account is debatable
As a result of these issues, cryptocurrencies have largely stayed out of the otherwise all encompassing IRS and FinCEN net.
What is likely to change?
Firstly, the most noticeable change proposed is to do with reporting. Whilst at the moment individuals (and criminal groups) can trade and exchange cryptocurrencies with little regard to the authorities, this would be the case no longer.
Proposed under the American Families Plan, cryptocurrency transactions with a fair market value greater that $10,000 would now need to be reported to the IRS. This would bring cryptocurrency transactions in line with cash transactions, and close the loophole on anonymous payments.
At this stage only the reporting of transactions has been proposed, but it would be wise to consider this as a first move to more closely regulate and monitor the currently cloaked economy involving cryptocurrency.
Whilst this may seem like only a minor change, it is a seismic move for those who chose to transact in cryptocurrencies for its private nature. One of the key aspects around the development of cryptocurrencies was the privacy it enabled, which simply didn’t exist for online transactions. Previously not a concern when most transactions were made in cash and therefore out of view of the authorities, cryptocurrencies brought the anonymity of a cash transaction into the digital age.
Watch this space, as reporting is likely just the beginning of major changes to bring cryptocurrency transactions into the transparent age of online transacting.
- Notice 2014-21, 2014-16 I.R.B. 938