This Supreme Court Case and IRS Broker Rule Together Could Redefine Crypto Taxation

Hongji Feng
Last updated: | 3 min read
IRS Crypto Tax
Source: DALL·E

A critical Supreme Court case and its ruling could redefine the taxation of digital assets. Intersecting with the vexed IRS broker rule announced earlier, this case may potentially reshape crypto tax reporting and compliance on a fundamental level.

The case in question, Moore v. U.S., revolves around a dispute concerning the tax treatment of certain investments. Charles and Kathleen Moore, the plaintiffs, are challenging a tax imposed on their investment in an India-based company. They argue that they had not realized income from this investment when the law was enacted, meaning they had not cashed in their profits or brought these profits back to the U.S. to make them subject to taxation under the 16th Amendment. Ratified in 1913, the 16th Amendment grants Congress the power to levy income taxes without apportioning them among the states based on population.

Defining ‘Income’ in the Digital Age

The argument focuses on the definition of “income” and “realized income”, questioning whether unrealized gains should be subject to tax. While this case primarily concerns overseas investments, its outcome could spark a broader debate about the taxation of various investment types, potentially influencing the tax code’s treatment of emerging asset classes, including digital assets like cryptocurrencies.

The Supreme Court will hear the case on Dec. 5, and the outcome of Moore v. U.S. could carry significant consequences for cryptocurrency investors. If the Moores lose, it could enable the government to tax digital asset investments like Bitcoin, Ethereum, or altcoins based on increased values, regardless of whether these gains have been cashed in or not. Conversely, a win for the Moores might establish that gains from such investments are not taxable until they are “realized” in a more traditional sense, such as being converted to cash.

The interpretation of “realization” in cryptocurrency, however, remains a contentious point. For example, some view the use of Bitcoin to purchase other altcoins as a realization of gains, essentially converting one investment form into another. This debate exemplifies the complexities and evolving landscape of tax regulations in the digital asset domain, highlighting the pressing need for clear, comprehensive guidelines.

A Reddit User’s Crypto Tax Surprise

Reddit user “Frosty_Huskers07” presents a live example of the complexities and challenges faced by cryptocurrency investors under the current tax laws. An early investor in Bitcoin and Ethereum, they faced unexpected tax implications during the 2021 crypto boom. “I was inexperienced and did not understand the concept every time I did this it created a taxable event,” they explained, referring to their trades from Bitcoin and Ethereum into various altcoins, including Solana (SOL), Chainlink (LINK), and Litecoin (LTC).

Source: DALL·E

Believing that tax liabilities only arose when converting to USD, the user now finds themselves owing the IRS over $50k for 2021. Their portfolio, which had soared to around $330k, plummeted in value during the market crash, stabilizing at around $80k, diversified across several digital currencies. It remains unclear whether “Frosty_Huskers07” received this tax assessment directly from the IRS, derived it through their own calculations, or consulted with tax experts for this estimation.

IRS’s Broker Rules and Crypto Oversight Future

The IRS’s newly proposed digital asset broker reporting regulations, introduced in August 2023, have sparked widespread debate within the cryptocurrency sector. These regulations, which came under scrutiny during a public hearing following a deluge of nearly 125,000 comments, propose to expand the definition of “broker” for tax reporting purposes in a decentralized environment.

Coinbase, in a strongly worded comment letter, raised alarms about potential “unprecedented, unchecked, and unlimited tracking into the daily lives of American citizens.” This stance reflects a broader industry concern that the IRS’s approach, while aiming for transparency and fairness in treating cryptocurrencies like traditional assets, could lead to overcomplex and invasive regulations. As the implications of the Moore v. U.S. case collide with the IRS’s new broker regulations, the landscape of cryptocurrency reporting and taxation faces a potential overhaul.