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Biden’s 2025 Budget Proposal Aims to Tax Capital Gains at 45%, Eliminating Crypto Tax Loopholes
(Kitco News) – Wealthy investors may be in for an unpleasant surprise next time they pay taxes as President Biden proposed his 2025 highest capital gains tax in 100 years budget proposal.
“Together, the proposals would increase the maximum marginal rate on long-term capital gains and qualified dividends to 44.6%,” the proposal states.
Based on this figure, the combined federal and state capital gains tax would exceed 50% in many states, including California (59%), New Jersey (55.3%), Oregon (54.5%), Minnesota ( 54.4%) and New York. (53.4%).
The tax rate increase would be added to the unofficial tax – inflation – and since capital gains are not indexed to inflation, the effective rate many will pay will be higher than indicated in the figures provided in the proposal.
If passed, the budget means that high-yield investors in stocks and cryptocurrencies could see their investment income significantly reduced, as capital gains tax is added to the current 22% federal income tax.
The budget proposal also seeks to increase the corporate income tax rate to 28%.
Second to John Kartch, an analyst at Americans for Tax Reform, “Biden’s proposed capital gains tax rate is more than double China’s…and puts the United States in uncharted territory.”
“Biden’s proposed capital gains tax increase will also hit many families when parents die,” Kartch said. “Biden proposed adding a second death tax (separate and in addition to the existing one) eliminating a stepped-up basis upon the death of parents. This would result in mandatory capital gains tax on death – a forced realization event.”
The budget also proposes to eliminate a special tax subsidy for cryptocurrencies and other transactions.
Cryptocurrency investors are currently subject to rules that differ from investments in stocks and other securities, including the ability to sell a crypto asset at a loss, claim losses to reduce your tax liability, and then buy back the same asset shortly thereafter.
The Budget aims to end this tax subsidy by updating the tax code’s anti-abuse rules to treat cryptocurrencies similarly to stocks and other securities.
This aligns with a new tax form project issued by the Internal Revenue Service (IRS) which proposes to track specific crypto transactions.
The draft Digital Asset Proceeds from Broker Transactions shows that taxpayers will be required to file Form 1099-DA, which collects trader identification and detailed transaction data from cryptocurrency “brokers.”
“I don’t think cryptocurrencies will be any more pseudo-anonymous or privacy-friendly, at least in the United States.” She said Shehan Chandrasekera, crypto accountant and tax manager at CoinTracker, in response to the draft form. “Brokers (CeFi exchanges, some DeFi exchanges, and wallets) will be required to generate this form for each sales transaction and submit this information to the IRS and to you (same as stock brokers) starting 1/1/2025.”
Chandrasekera said that while the form includes requests for “unsurprising” data, such as acquisition date, sale date, proceeds and cost basis of crypto assets sold, it also requires “the collection and reporting of additional data points (particularly wallet addresses) to the IRS on a large scale [which] could lead to serious privacy and security issues.”
These data points include “Sales Transaction ID (TxID); Address of the digital asset from which the units were sold; Number of units sold; Transfer TxID number; Address of the digital asset for transfer; and number of units transferred,” she said.
“Also, in the new draft Form 1099-DA, the IRS has included ‘non-hosted wallet provider’ as a checkbox,” Chandrasekera said. “This further signals the IRS’s intent to include non-hosted wallets in the definition of brokers, despite industry feedback.”
He said that in future cryptocurrency traders “will likely be required to provide KYC information before creating an unhosted wallet and/or when interacting with platforms via unhosted wallets,” warning: “This could dramatically change how users interact with crypto platforms will change “DeFi” as we know it today.”
Second for Jessalyn Dean, VP of Tax Information Reporting at Ledtable, the draft 1099-DA represents “the first major material step towards tax information reporting for digital assets.”
“As expected, the look and feel is similar to Form 1099-B for reporting sales of traditional financial products (e.g. stocks),” Dean said. “The majority of boxes align as expected with the required information listed in the August 2023 proposed regulations.”
He said: “The inclusion of a ‘wash sale loss not permitted’ box does not mean that cryptocurrencies are subject to the wash sale rules. It is included for the purposes of digital assets which are also stocks or securities already subject to the wash sale rules. washing (e.g. some tokenized shares).”
The form also includes a box to indicate “that a sale is not recorded in the distributed ledger,” he said. “This is necessary because very often digital asset addresses or transaction IDs cannot be provided because the transactions occurred within internal record-keeping systems.”
Dean said the only area that needs clarification is Box 5, which “is for a broker to indicate that a loss is not deductible due to a ‘reportable change in control or capital structure’ and refers to the form 8949 and the instructions in Annex D.”
“None of these instructions provide guidance on what type of events in the cryptocurrency and digital asset sector might apply in these circumstances,” he said. “They rely on the broker to simply figure it out in the dark with the additional statement that ‘The broker should advise you of any losses on a separate statement.’”
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