President Biden’s 2025 budget proposal has sent shockwaves through the investment community, particularly among high-earning investors. The proposal outlines the highest top capital gains tax in over a century, which could significantly impact the returns of both stock and crypto investors.
A Historic Increase in Capital Gains Tax
The budget proposal suggests a substantial increase in the top marginal rate on long-term capital gains and qualified dividends to 44.6 percent. This figure, when combined with state taxes, could push the total capital gains tax above 50% in several states, including California, New Jersey, Oregon, Minnesota, and New York.
Moreover, the proposal does not index capital gains to inflation, which means the actual rate many investors will pay could be higher than the stated figures. This “unofficial tax” of inflation could further erode investment returns.
The Impact on High-Earning Investors
If the budget is approved, high-earning investors in stocks and cryptocurrencies could see their profits significantly reduced. The capital gains tax, when added to the current federal income tax of 22%, could take a substantial bite out of investment returns.
Corporate Income Tax Hike
The proposal also seeks to increase the corporate income tax rate to 28%. This move could have wide-ranging implications for businesses and the broader economy.
Changes to Cryptocurrency Tax Rules
The budget proposes eliminating a special tax subsidy for cryptocurrency transactions. Currently, crypto investors can sell an asset at a loss, claim the losses to reduce their tax liability, and then repurchase the same asset shortly afterward. By amending the tax code’s anti-abuse regulations to treat cryptocurrency assets similarly to stocks and other securities, the plan seeks to eliminate this subsidy.
This change aligns with a new draft tax form released by the Internal Revenue Service (IRS) that proposes tracking specific crypto transactions. The form, known as Form 1099-DA, will require crypto “brokers” to collect detailed transaction data and submit it to the IRS.
Privacy Concerns
The proposed changes have raised privacy and security concerns among crypto investors. The new form requires the collection and reporting of additional data points, including wallet addresses, to the IRS. This could lead to major privacy and security concerns, particularly as the IRS intends to include unhosted wallets under the broker definition.
Changes in Crypto Trading
Experts predict that crypto traders will likely need to provide Know Your Customer (KYC) information before creating an unhosted wallet or interacting with platforms via unhosted wallets. This development could drastically alter how users interact with crypto platforms and potentially transform the decentralized finance (DeFi) sector as we know it today.
The Advent of Form 1099-DA
Jessalyn Dean, VP of Tax Information Reporting at Ledgible, highlights the introduction of the draft 1099-DA as the first major material step towards tax information reporting for digital assets. The form bears a resemblance to Form 1099-B, which is used for reporting sales of traditional financial products like equities.
Most of the boxes in the form align with the required information listed in the proposed regulations from August 2023. However, Dean points out that the inclusion of a ‘wash sale loss disallowed’ box does not imply that crypto is subject to wash sale rules. Rather, it applies to digital assets—like some tokenized equities—that are also stocks or securities that are already governed by similar regulations.
Unrecorded Sales and the Distributed Ledger
Additionally, there is a box on the form to mark sales that are not included in the distributed ledger. This is necessary because digital asset addresses or transaction IDs often cannot be provided as transactions occur within internal record-keeping systems.
The Need for Clarification
Dean identifies Box 5, which is for a broker to indicate that a loss is non-deductible due to a ‘reportable change in control or capital structure’, as an area that needs clarification. The instructions for Form 8949 and Schedule D do not provide guidance on what kind of events in crypto and digital assets could apply in these circumstances. They defer to the broker to figure it out, advising that the broker should inform you of any losses on a separate statement.
In summary, President Biden’s 2025 budget proposal heralds significant changes for investors, especially high-earners and cryptocurrency traders. The proposed increase in capital gains and corporate taxes could dampen returns, while stricter regulations on crypto transactions raise privacy concerns. Navigating these shifts will require vigilance and adaptation to the evolving fiscal climate.
