IRS Targets Crypto Tax Compliance in Cannabis Sector: New Regulations Explained

Are you involved in the crypto world, especially within the burgeoning cannabis industry in the United States? If so, pay close attention! The Internal Revenue Service (IRS) is intensifying its scrutiny on cryptocurrency investments, and they’re starting with the cannabis sector. Let’s break down the latest IRS notice and what it means for you.

Decoding the IRS Letter: What’s the Message?

Commissioner De Lon Harris of the IRS recently signed a crucial letter, clearly signaling the federal agency’s commitment to ensuring cryptocurrency tax compliance. This isn’t just a general statement; it’s specifically aimed at cannabis growers, distributors, and sellers across the United States. Why cannabis?

It appears the IRS is prioritizing the cannabis sector due to the increasing use of cryptocurrencies in this industry. Commissioner Harris didn’t mince words, stating that cryptocurrency usage is a “top enforcement priority” for the IRS within the cannabis sector. This announcement aligns with a Senate proposal from July 2021, indicating a broader government effort to tighten the reins on cryptocurrency taxation and reporting for businesses.

What’s the IRS’s stance on crypto? Harris clearly articulated it:

“Those who use it [cryptocurrencies] need to understand that the IRS considers it property, and there are gains that are taxable.”

Essentially, the IRS views cryptocurrency not as currency in the traditional sense, but as property, similar to stocks or real estate. This distinction is crucial because it dictates how crypto is taxed – primarily through capital gains when you sell or exchange it for a profit.

Adding to this, Commissioner Harris advised cannabis businesses to utilize reputable cryptocurrency exchanges for converting their crypto holdings into US dollars. This suggests the IRS is also keeping an eye on the pathways between crypto and fiat currency within this sector.

Big Crypto Transactions Under the Microscope

While the IRS hasn’t explicitly demanded separate reporting for high-value crypto transactions *yet*, there’s a significant existing rule to be aware of: Form 8300. Any business, including those in the cannabis sector, must file Form 8300 for every single transaction exceeding $10,000. This applies to cash transactions, and the IRS is clarifying that it extends to cryptocurrency as well.

This focus on high-value transactions is further emphasized by last-minute additions to the Senate’s bipartisan infrastructure bill. These changes were specifically designed to tap into crypto investments and transactions, aiming to generate a substantial $28 billion in revenue through taxation. This highlights the government’s growing interest in crypto as a significant source of tax revenue.

Potential Tax Hikes on the Horizon? House Steps In

Following the IRS’s lead, the House of Representatives is also considering new tax measures that could significantly impact crypto investors. On September 13th, House Democrats introduced proposals to increase the tax rate on long-term capital gains. If these proposals become law, it could mean a 5% tax increase on crypto gains for “certain high-income individuals.”

According to reports from Cointelegraph, the proposed legislation doesn’t stop there. It also includes a 3.8% surtax on net investment income. Combined, these measures could push the top tax rate for some crypto investors to a substantial 28.8%.

But that’s not all. The IRS’s new tax proposal is also set to implement the “wash-sale rule.” Let’s understand what this means:

What is the Wash-Sale Rule?

The wash-sale rule is designed to prevent investors from manipulating their tax liabilities by selling assets at a loss and then quickly repurchasing them to claim a tax deduction while essentially maintaining their investment position. Currently, this rule applies to stocks and securities, but the new proposal aims to extend it to cryptocurrencies and other digital assets.

Impact of Wash-Sale Rule on Crypto:

• No more tax-loss harvesting loopholes: Investors will no longer be able to sell crypto at a loss and immediately buy it back (or substantially identical crypto) to offset capital gains.
• Increased tax complexity: Crypto investors will need to be even more meticulous in tracking their trades to ensure compliance with the wash-sale rule.
• Potentially higher tax bills: For those who previously utilized wash sales for tax optimization, this rule could lead to a higher overall tax burden.

The US authorities believe that some crypto investors have been using wash sales to artificially minimize their reported financial progress, and this new measure aims to close that perceived loophole.

Key Takeaways: Crypto Tax Compliance is Now a Priority

Here’s a quick summary of what you need to know:

• IRS Focus on Cannabis Crypto: The IRS is specifically targeting the cannabis industry for crypto tax compliance.
• Crypto = Property: The IRS considers crypto as property, making gains taxable.
• Form 8300 for Big Transactions: Transactions over $10,000 in crypto may require filing Form 8300.
• Potential Tax Hikes: The House is considering increasing capital gains tax and adding a surtax, potentially raising crypto tax rates for high-income earners.
• Wash-Sale Rule Coming: The wash-sale rule is likely to be extended to crypto, eliminating tax-loss harvesting strategies.

Actionable Insights: What Should Crypto Investors Do?

1. Stay Informed: Keep up-to-date with the evolving crypto tax regulations from the IRS and Congress.
2. Maintain Detailed Records: Accurately track all your crypto transactions, including dates, amounts, and values, for tax reporting.
3. Consult a Tax Professional: Given the increasing complexity of crypto taxes, seeking advice from a qualified tax professional is highly recommended. Especially if you operate in the cannabis sector or engage in high-value crypto transactions.
4. Use Reputable Exchanges: As advised by the IRS, utilize trustworthy crypto exchanges for converting crypto to fiat currency.

The message from the IRS and lawmakers is clear: cryptocurrency is firmly on their radar, and tax compliance is no longer optional. Whether you’re in the cannabis industry or simply a crypto investor, understanding and adhering to these evolving regulations is crucial to avoid potential penalties and ensure you’re on the right side of the law.

Read More: Infrastructure Bill to be voted on by the US House of Representatives, this week