Affluent investors may face an unwelcome shock during their next tax filings, with President Biden proposing the highest top capital gains tax in over a century in his 2025 budget plan.
“The proposals would collectively elevate the top marginal rate on long-term capital gains and qualified dividends to 44.6 percent,” stated the proposal.
Using this data, the total federal and state capital gains tax would surpass 50% in numerous states, such as California (59%), New Jersey (55.3%), Oregon (54.5%), Minnesota (54.4%), and New York (53.4%).
The heightened tax rate would combine with the informal tax — inflation. Given that capital gains aren’t adjusted for inflation, the effective rate for many individuals will surpass the figures outlined in the proposal.
If passed, the budget implies that affluent stock and crypto investors might witness substantial reductions in their investment returns, given that the capital gains tax is levied on top of the existing federal income tax of 22%.
Furthermore, the budget proposal aims to raise the corporate income tax rate to 28%.
John Kartch, an analyst at Americans for Tax Reform, stated, “The proposed Biden top capital gains tax rate exceeds China’s rate by more than double… and places the United States in unprecedented territory.”
“Biden’s suggested increase in capital gains tax will impact numerous families upon parental death,” Kartch remarked. “He aims to introduce a secondary Death Tax by eliminating stepped-up basis, resulting in a compulsory capital gains tax at death.”
The budget further suggests abolishing a specific tax subsidy for cryptocurrency and other transactions.
Currently, crypto investors face distinct rules compared to stocks and other securities, allowing them to sell a crypto asset at a loss, utilize the losses to lower their tax obligations, and subsequently repurchase the same asset shortly afterward.
The Budget aims to terminate this tax benefit by revising the tax code’s anti-abuse regulations to treat crypto assets akin to stocks and other securities.
This coincides with a recent draft tax form issued by the Internal Revenue Service (IRS), suggesting the monitoring of particular crypto transactions.
The Digital Asset Proceeds From Broker Transactions draft indicates that taxpayers must complete Form 1099-DA, gathering trader identification and detailed transaction data from crypto “brokers.”
Shehan Chandrasekera, a crypto accountant and head of tax at CoinTracker, commented on the draft form, stating, “I believe crypto anonymity or privacy will no longer exist, especially in the US. Brokers (CeFi exchanges, specific DeFi exchanges, and wallets) will need to generate this form for every sale transaction and submit the information to the IRS and you (similar to stock brokers) from 1/1/2025 onwards.”
Chandrasekera noted that while the form includes expected data requests like date acquired, date sold, proceeds, and cost basis of crypto assets sold, it also mandates the “collection and reporting of additional data points (especially wallet addresses) to the IRS at scale [which] could lead to significant privacy and security concerns.”
These additional data points encompass “Sale transaction ID (TxID); Digital asset address from which the units were sold; Number of units sold; Transfer-in TxID number; Transfer-in digital asset address; and Number of units transferred in,” he stated.
“Additionally, in the latest draft Form 1099-DA, the IRS has added ‘unhosted wallet provider’ as a checkbox,” Chandrasekera remarked. “This further indicates the IRS’s intent to encompass unhosted wallets within the broker definition, despite industry feedback.”
He indicated that moving forward, crypto traders “will likely need to furnish KYC information before establishing an unhosted wallet and/or when engaging with platforms via unhosted wallets,” cautioning, “This could significantly alter how users engage with crypto platforms and reshape ‘DeFi’ as we presently know it.”
According to Jessalyn Dean, VP of Tax Information Reporting at Ledgible, the draft 1099-DA signifies “the initial significant step towards tax information reporting for digital assets.”
“As anticipated, the format closely resembles the Form 1099-B for reporting sales of traditional financial products (e.g. equities),” Dean remarked. “Most of the sections align as expected with the necessary information outlined in the proposed regulations from August 2023.”
She clarified, “The inclusion of a ‘wash sale loss disallowed’ Box 1i doesn’t imply that crypto is subject to wash sale rules. It’s included for digital assets also classified as stock or securities already subject to wash sale rules (e.g. certain tokenized equities).”
She noted that the form includes a section to signify “a sale not recorded on the distributed ledger,” which is essential because transactions often occur within internal record-keeping systems, making it difficult to provide digital asset addresses or transaction IDs.
Dean mentioned that the one area requiring clarification is Box 5, designated for a broker to indicate a non-deductible loss due to a “reportable change in control or capital structure,” referencing Form 8949 and Schedule D Instructions.
“Neither of these instructions provide guidance on applicable events in crypto and digital assets,” she explained. “They leave it to the broker to determine, with the additional statement that ‘The broker should inform you of any losses on a separate statement.'”
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