From record lows in crypto trading volume, to high-profile legal battles, to Bitcoin’s eventual climb past the $40,000 range, 2023 was full of surprises. It’s safe to say that uncertainty is the only certainty in the tumultuous lands of cryptocurrencies.
While we can’t predict every twist and turn in crypto’s legal future, one thing is certain: Staying informed and proactive is essential.
To bring some much-needed clarity to the chaotic regulatory landscape, we’ve consulted our experienced crypto team—led by attorney and CPA Andrew Gordon—to shed some light on what’s in store for 2024.
This post will break down our top 6 predictions for what may become the biggest year yet for blockchain technology. While we don’t know exactly what will happen in 2024, these are our best bets.
1. 2024 Will Be the Year of Crypto Tax Audits
“Nothing stimulates the mind like a session of number crunching in response to an IRS audit,” said no one ever. Yet despite our aversion to them, tax audits are one of those things that are part and parcel of the adult experience.
For traders of blockchain-powered assets, we’re expecting a massive spike in cross-examinations by the tax authorities this year. In fact, we believe that 2024 may go down as the year of cryptocurrency tax audits.
Based on our experience, the IRS typically opens examinations for a specific tax year subject approximately 3 years after the fact. Trace back 3 years from today and you’ll land at 2021. That year witnessed what many call the bull run of all bull runs, with the trading volume for crypto assets jumping to a record $131+ trillion. In addition, 2021 was the year that NFTs and DeFi exploded in popularity, creating new and extremely complex challenges for cryptocurrency tax reporting.
Connecting those dots reveals an unmistakable picture: that record trading volume will likely translate into record cryptocurrency tax audits this year.
2. Binance Will Receive a John Doe Summons from IRS
The IRS can request information from cryptocurrency exchanges about any customers who meet a certain predefined profile. As an example, the authorities can seek information on all traders whose trading volume meets a certain threshold (commonly $20,000). This strategy is popularly known as the John Doe summons.
IRS has a history of issuing John Doe summons to cryptocurrency exchanges to root out any traders who may be underreporting their gains. The tax authority has already utilized this strategy successfully against Coinbase in the past. Following that success, there’s been a significant rise in its usage, with John Doe summons being sent to Kraken, Poloniex, and OX Labs recently.
Our team believes that 2024 will see that list continue to grow in 2024, with Binance being a clear target.
This will add to the list of legal threats for the world’s leading cryptocurrency exchange, as Binance recently agreed to pay $4 billion for violations related to the Bank Secrecy Act (BSA), failure to register as a money transmitting business, and the International Emergency Economic Powers Act (IEEPA).
3. Form 1099-K Will Fill the Void of 1099-DA until 2026
As form 1099-DA reporting requirements loom in 2026, crypto exchanges will attempt to ease the transition using another, less favorable tax form: Form 1099-K. Crypto.com, Bitstamp, and Gemini are leading examples of exchanges already sending these forms to their customers.
Unfortunately, this has already led to widespread confusion and uncertainty for many cryptocurrency traders. The internet (along with our inbox) is filled with stories of worried traders whose 1099-K forms highlight receipts that are orders of magnitude higher than their actual gains.
Let’s begin by demystifying this form. Unlike other forms that are supposed to highlight gains and losses or report specific types of ordinary income, the 1099-K simply reports gross trading volume. This is relatively simple for crypto exchanges to issue, but it creates a world of headaches for investors. For starters, that translates into a minimum total of twice the funds—as a separate activity is recorded for both deposits and withdrawals.
But it gets even more confusing for cryptocurrencies. In the complex world of decentralized finance, it is possible to trigger multiple transactions in a single day autonomously.
For example, many lending protocols reinvest the principal capital along with gains at the end of each month. So a $10,000 fund could balloon into the millions once all those individual activities are tallied in the 1099-K. Even the simple act of transferring funds between different accounts could dramatically exaggerate the reported trading activity.
Because Form 1099-K can make your gains appear much higher than they really are, it’s extremely important to report cryptocurrency correctly on your tax return. Otherwise, the IRS may try to tax funds that you don’t even have. The video below shows an example of the issues that Form 1099-K can cause.
4. 2024 Elections Unlikely to Make Major Impact on the Crypto Market
With the country gearing up for another election year, all crypto and finance pundits are pondering the implications of either side’s victory on the crypto landscape.
However, while the Republican side is slightly more blockchain-friendly, it seems unlikely that the results of the elections will have any major implications for the blockchain space. Taxing and regulating cryptocurrency seems to be one of those rare subjects where both sides agree.
That said, the general tax laws may be more favorable from a Republican candidate. Trump’s 2017 Tax Cuts and Jobs Act is set to expire in 2026, but a Republican victory would boost the probability of that law getting renewed.
While recent years have brought several bills focused on comprehensive crypto regulation into the mainstream discourse, we’re unlikely to see legislation of this nature pass in an election year.
5. The SEC Will Continue Its Approach of Regulation-by-Enforcement
When it comes to cryptocurrencies, it’s not just the market that’s in a constant state of flux—crypto’s regulatory future is rather unpredictable, as well.
The question of whether cryptocurrencies, NFTs, and other digital assets are securities is one of the major regulatory issues of the 21st century. Without clear regulations in place, the SEC has taken a regulation-by-enforcement approach, particularly in 2023.
Instead of formal rulemaking with a functional framework for all parties involved, the SEC is attempting to define cryptocurrencies as securities by launching individual cases against incumbents—particularly cryptocurrency exchanges. Unfortunately, such an ambiguous approach leads to a lot of uncertainty and often unnecessary fear in the markets.
As of this writing, the SEC has ongoing investigations against popular exchanges Coinbase, Binance, and Kraken, among others. While a ruling against the SEC in the landmark Ripple case was celebrated as a relief by many in the crypto markets, there’s still a long way to go in this legal battle. Our team expects the SEC to appeal that verdict and continue its case against Ripple.
Whether digital assets will legally be considered securities or commodities is still fair from certain. However, we can expect with reasonable confidence that the SEC will march forward into the new year armed with the same strategy.
6. The End of the Wash Sale Loophole
Did you know it’s possible to reduce your tax bill by deducting the depreciated value of an asset? Better yet, did you know you could buy that asset back after the fact? This is the same strategy many crypto investors use to save thousands of dollars as part of their tax loss harvesting plan.
In essence, the owner sells their asset, marks off the capital loss, and then re-acquires it after a short time (typically 24 hours). This is currently allowed for cryptocurrencies since they aren’t legally defined as securities.
However, the wash sale rule may soon be applied to crypto, ending this loophole. The wash sale rule is a legal mechanism that prevents tax loss harvesting on stocks that were repurchased within 30 days of the sale. While the wash sale rule doesn’t apply to cryptocurrencies yet, there’s a good chance this will change in the coming weeks.
As part of the Biden administration’s proposed 2024 budget, cryptocurrencies will come into the folds of the wash sale rule, turning this loophole into a thing of the past. The budget has not passed into law yet, and the wash sale provision could be removed before it does, but we expect that cryptocurrency investors will lose this tax advantage in 2024.
Your Guide Through the Changing Legal Landscape
In the ever-changing realm of cryptocurrency regulations and taxation in 2024, one thing is clear: This is a year of regulatory challenges and opportunities.
As crypto enthusiasts, traders, and investors, it’s more important than ever to stay informed and take proactive measures to avoid problems with the IRS or other federal agencies.
Gordon Law is here to assist you in navigating this uncertain legal landscape, as we have been since 2014. Our team of cryptocurrency attorneys and accountants provides clarity and straightforward guidance.
If you have any questions about crypto tax and legal regulations, don’t hesitate to reach out.
