Trending Crypto Tax Topics for 2022
What's on the horizon for crypto tax? We weigh in on which issues will continue to shape the crypto tax landscape for years to come.
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With the tax deadline approaching, many of us are deep in the weeds of our individual crypto tax returns. However, with the tax season coming to a close, we’re reflecting on the major trends of the 2021 tax year and looking ahead to 2022 and beyond. Here are 8 crypto tax topics we think will be important in the coming year(s).
1. Crypto meets personal finance
As digital assets go mainstream, we’re seeing discussions of crypto personal finance. Investors are using crypto assets to save for retirement, purchase cars or homes, and create inheritances for their families. Although companies are popping up to facilitate these strategies—crypto loans, crypto mortgages, crypto IRAs, and the like—investors still often must jump through hoops to convince traditional lenders to accept crypto as assets or find attorneys and estate planners that understand the space.
We expect many consumer finance institutions will have to reckon with crypto assets in the near future, which will also introduce new tax considerations. Investors and their financial advisors will have to learn about the tax implications of major dispositions, different types of crypto retirement accounts, and adding crypto assets to an estate. Additionally, cooperation with commercial banks and lenders may encourage exchanges to standardize their crypto data reporting, eliminating many crypto tax headaches.
2. Nonprofits embrace digital asset donations
Using crypto for charitable donations has several benefits: in Ukraine, we’ve seen how crypto’s decentralized structure allows for quicker, easier, and cheaper cross-border transfers. However, it also has tax benefits: many crypto investors, notoriously hostile to taxes, prefer making large tax-deductible donations to 501(c)(3)s to sending cash to the IRS.
Investors need to be aware of the criteria for receiving the maximum deduction: an asset must be held for more than a year, must be sent to a 501(c)(3), and must be transferred directly to the organization (cashing out is a taxable event). Additionally, large donations need substantiation from the organization and/or an outside appraiser; in coming years (months?) more non-profits will investigate ways to streamline this process for donors.
3. DAOs raise tax questions
Decentralized autonomous organizations (DAOs), are a central component of Web3. Put very simply, DAOs are community-owned organizations governed by smart contracts instead of any central leadership. While many Americans were introduced to DAOs with ConstitutionDAO, which raised $47 million in a failed attempt to buy a copy of the Constitution, there are many more pragmatic DAOs. MakerDAO, for example, is one of the oldest and largest crypto lending platforms, which has gradually decentralized its governance since its founding in 2017.
DAO taxes pose a lot of questions for crypto tax preparers. They are decentralized by nature, so it’s unclear where or how the organization would be taxed; however, these entities have a lot of assets. For example, in 2021 The Maker Foundation transferred $512 million of tokens into the DAO’s treasury. Should this be treated as income? If so, who would pay tax on it? Some suggest that the IRS may choose to treat DAOs as pass-through entities, but no one knows for sure.
4. P2E gamers face the music
When most in-game elements are NFTs, most in-game actions are actually…taxable transactions. This is a harsh truth that many play to earn (“P2E”) gamers are learning this tax season. For example, in the popular NFT game Axie Infinity, breeding an Axie, earning SLP, buying anything from the Marketplace is a taxable event.
What’s more, the game has a massive system of "scholarships." In a scholarship agreement, an Axie owner lends an Axie to a player who doesn't own an Axie. The lender can battle the Axie, winning SLP, which they then share with the Axie owner. This system may produce more taxable events for the owner than they expected: the owner incurs income tax when their Axie wins SLP, but also capital gains when they distribute the payments to scholars.
In short, P2E gamers can end up having thousands and thousands of taxable transactions. And what’s worse, most P2E games don’t offer organized data exports. If you played P2E games in 2021, consult your tax professional and find a crypto tax calculator now rather than later.
5. Regulatory action looms
It’s been a refrain for several years now, but now it’s louder than ever: regulatory frameworks for cryptocurrency are coming to countries across the globe. In the U.S, President Biden finally released his executive order on cryptocurrency, which instructed several agencies to investigate how to develop a more robust regulatory landscape for digital assets.
The push for regulation is also occurring at the state and local level. For example, New Jersey just became the first state to issue comprehensive crypto tax regulations.
As more information on planned regulation becomes known, one thing to look out for will be the differences in regulation between centralized and decentralized exchanges.
6. NFTs become inventory
In 2021, NFTs exploded, and some made them their main source of income. If you’re an artist/creator or dealer, and NFTs become your business rather than a hobby, they’re no longer treated as capital assets, but instead are treated essentially as inventory. This means they are taxed as income rather than receiving preferable capital gains crypto tax rates. What’s more, creators have to pay an additional 15.3% self-employment tax.
This change in tax liability raises the question: at what point does creating and trading NFTs become a business rather than a hobby? For some the classification is clear: if most of your income is from creating NFT art, you’re operating an NFT business. But for others, it’s trickier. It’s important that people in these edge cases consult a tax professional and use NFT tax software to make sure they are filing correctly.
7. States woo miners with tax breaks
With crypto mining stymied in Chinaand disrupted in Kazakhstan, large mining operations are moving stateside. Several states are vying for their business with major tax incentives. For example, Texas is offering a 10-year tax abatement and Kentucky has extended clean-energy tax breaks to major crypto miners.
These mining-friendly tax breaks are raising controversy in their respective states: Should Texas introduce more energy-intensive operations to its already stressed grid? Does crypto mining really count as a “clean energy” business? Whatever your take, as these kinds of incentives are offered by more states, tax breaks for crypto mining are bound to remain in the news.
8. Protocols start developing with taxes in mind
This may be more of a crypto tax wishlist item than a trend, but in 2022 we hope to see more protocols considering tax implications when building platforms. Unfortunately, the mechanisms of a smart contract can be both innovative and a tax challenge.
To ease adoption, we believe that protocols should, and will, consider taxes during the early stages of development. This is an important collaboration opportunity for blockchain developers, crypto tax accountants, and software developers.
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Last reviewed by Arthur Teller, CPA on August 16, 2022 · Sources