US Proposed Unrealized Gains Tax May Become ‘Penalty for Being Successful’ in Crypto

The proposed 20% tax on unrealized gains put forward by the US Department of Treasury’s 2023 Revenue Proposal could potentially become a “penalty for being successful,” according to Shehan Chandrasekera, Head of Tax Strategy at crypto tax software specialist CoinTracker.

Voicing the concern shared by a significant part of the crypto industry, Chandrasekera decried the proposal as “ridiculous,” and explained that the levy introduces uncredited pre-payment credits which can offset the actual capital gains tax that gets triggered once a taxpayer disposes of the assets, and realizes their gains in the future.

“You have to report the total cost basis, market value, and liabilities of assets you own to the [US tax authority] IRS annually.  There are two types of assets: tradable assets & non-tradable assets,” he said.

For tradable assets, such as stocks and crypto, taxpayers are to use market data for their valuation.

The proposal introduces fiscal regulations for so-called illiquid taxpayers, i.e. taxpayers who hold tradable assets which contribute to less than 20% of their net worth. Such taxpayers would be allowed to pay the 20% tax only on unrealized gains applicable to tradable assets, including crypto.

“But, there’s a catch here,” according to Chandrasekera.

Under the proposal, taxpayers who are classified as illiquid may choose to include only unrealized gain in tradeable assets in the calculation of their respective minimum tax liability.

“However, taxpayers making this election would be subject to a deferral charge upon, and to the extent of, the realization of gains on any non-tradeable assets. The deferral charge would not exceed ten percent of unrealized gains,” according to the draft.

The Treasury also proposes to amend securities loan nonrecognition rules to cover digital assets, provided they apply to loans of such actively traded assets.

The department “would have authority to determine when a digital asset is actively traded, and the authority to extend the rules to non-actively traded digital assets. The proposal also would provide authority to the Secretary to extend the securities loan nonrecognition rules to other assets such as interests in publicly traded partnerships,” according to the proposal.

The latest development is part of efforts by the US Treasury to obtain more information on offshore crypto holdings. The government’s 2023 budget proposal is designed to overhaul the rules on digital asset taxation and produce close to USD 11bn in revenues by 2032.

Under the plan, the Treasury’s proposal is to be effective for taxable years beginning after December 31, 2022.

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