Crypto Tax Update (US) Q2 2023

Crypto Tax Update Q2 2023

 The following shares an update of potential tax legislation primarily for those located in the United States (US).

FASB issuing a draft of changing crypto asset accounting rules

            Currently under the generally accepted accounting principles (GAAP), crypto assets are considered as indefinite-lived intangible assets that are typically tested for impairment annually. The Financial Accounting Standards Board (FASB) is proposing making amendments (to be reviewed June 2023) that would require entities to “measure certain crypto assets at fair value in the statement of financial position each reporting period and recognize changes in fair value in net income” (FASB, 2023, p. 3). Key features of the type of cryptocurrency that this proposed amendment would apply to include that they must be in a distributed ledger based on blockchain technology, must be fungible, and cannot provide any claim to underlying goods, services, or other assets (meaning that NFTs and stablecoins would not qualify). Amendments also include a requirement to disclose crypto assets separately from other intangible assets. From a tax perspective, the amendments will not affect the benefit of a realized gain or loss method for tax purposes, as CFO (2023) reports.

Classification of NFTs

            The IRS intends to release further guidance on the classification of non-fungible tokens (NFTs) March 2023 (IRS, 2023a). The IRS had not previously included NFTs in their guidance but have since updated their website to include NFTs in their definition of digital assets (IRS, 2023b). The new guidance provided by the IRS (2023a) includes considering whether to classify certain NFTs as collectibles depending on their associated rights/assets. For example, any work of art is considered a collectible for tax purposes, thus raising the question whether an NFT that holds a digital art file ought to be considered a collectible. This raises a difference in the tax treatment of NFTs, particularly those held for longer than one year, as mentioned by the IRS (2023a). Currently collectibles held for longer than one year are subject to the maximum 28% capital gains tax rate, whereas non-collectible assets held for longer than one year are taxed at a lower rate (IRS, 2023a). Although this is not yet published guidance, it is being taken into consideration the purpose of NFTs and potentially applying different tax rates accordingly.

Biden proposing new legislation

            As a part of the Fiscal Year 2024 Budget Plan, released in March 2023, the Biden administration as included plans for ending tax-loss harvesting, as cryptocurrency is not under current wash sale rules. This change is significant due to the recent volatility in the crypto market from many entering the space in the peak of 2021, only to potential suffer from heavy losses (Tax Foundation, 2023).

            Biden’s plan also includes intentions to nearly double the capital gains tax rate for investors (39.6%, up from the current 20% tax rate). Additionally, Biden’s budget plan includes implementing a 30% energy tax from crypto mining operations.

OECD Base Erosion and Profit Sharing (BEPS)

            The OECD issued guidance February 2023 on the implementation of their two-pillar solution for international taxation (OECD, 2023). Their Agreed Administrative Guidance for the Pillar Two GloBE Rules include guidance on ensuring that multinational enterprises (MNEs) are subject to a 15% effective minimum tax rate (Wolters Kluwer, 2023).

References

CFO (2023). FASB issues draft of crypto asset accounting rules. Retrieved from CFO Accounting Article March 2023

FASB (2023). Exposure Draft: Proposed accounting standards update – intangibles – goodwill and other – crypto assets (subtopic 350-60). Retrieved from FASB Exposure Draft March 2023

IRS (2023a). Treatment of certain nonfungible tokens as collectibles. Retrieved from IRS Notice 2023-27

IRS (2023b). Definition of digital assets. Retrieved from IRS Digital Asset 

OECD (2023). International tax reform: OECD releases technical guidance for implementation of the global minimum tax. Retrieved from OECD Tax 

Tax Foundation (2023). Details and analysis of President Biden’s Fiscal Year 2024 Budget Proposal. Retrieved from Tax Analysis.

Wolters Kluwer (2023). Q1 2023: Status of OECD’s Two-Pillar Solution for international taxation (BEPS 2.0). Retrieved from Wolters Kluwer Expert Insights