Why investors must begin to think about crypto investing from a tax perspective

Lisa Ellis, MoffettNathanson Partner, joins Yahoo Finance to discuss new crypto reporting requirements in the updated infrastructure bill and what that means for the cryptocurrency industry.

Video Transcript

KRISTIN MYERS: I want to talk now about the infrastructure deal because it has largely been about rebuilding America's roads and bridges and railways and communication services, but it also has a provision to increase regulation on cryptocurrency. We're joined now by Lisa Ellis, partner at MoffettNathanson. So Lisa, let's just talk briefly about-- excuse me-- what these new regulations are that could be coming down the pike in this infrastructure bill.

LISA ELLIS: Yeah, it's always a little bit, you know, unclear initially because what happens in the final language is never always exactly how it starts out. But what it looks like it's kind of converging around is additional reporting requirements for the crypto brokerages. So this would be players like a Coinbase, a Gemini, a Kraken, even players like PayPal, Square, or Robinhood that enable their users to buy, sell, and hold cryptocurrencies, you know, functioning as brokers, essentially, that they would have increased reporting requirements that require them to report to the IRS, you know, information about the transactions, particularly transactions-- large transactions, like greater than, you know, $10,000, more information about when they occur and who is involved, et cetera.

ALEXIS CHRISTOFOROUS: Lisa, do you think that this may hasten a cryptocurrency ETF in the US when we finally get these new provisions from Washington?

LISA ELLIS: That's a-- well, it may help, I suppose. What's been holding up the crypto ETFs is that the SEC has very stringent requirements for things like liquidity, transparency, price stability when it comes to being willing to establish ETFs for certain asset classes. And so far, they've been wary of the crypto assets around whether or not they meet those requirements, you know, too much. So certainly, regulations in the US, particularly if other countries around the world sort of follow suit, that requires another level of transparency into crypto-related transactions would probably help allay some of the SEC's concerns around that.

In the meantime, though, the IRS, you know, of course, they're just trying to increase their tax revenues because many consumers either, you know, deliberately or just are unaware that they are, in fact, supposed to pay capital gains taxes on crypto investing. And so-- but the problem is that the IRS today doesn't really have any particularly good way of auditing that because they don't have visibility into the transactions, and so they're just trying to get this reporting level up so that they have a better ability to audit transactions and collect capital gains taxes.

KRISTIN MYERS: So about that point, you know, as the US government looking to collect a lot more money from that reporting on some of these cryptocurrency transactions, what does this really mean for just the average person that might be out there watching that is on Robinhood or Coinbase or some of the other platforms buying and selling Bitcoin, Dogecoin, Ethereum, and some of the other cryptocurrencies?

LISA ELLIS: You know, what it means for the individual investor in crypto is that they need to be-- need to start thinking about crypto investing from a tax perspective the same way they would stock investing, where if you're doing stock investing, you're very well aware that short-term gains, you have to pay short-term capital gains taxes. If it's a long-term gain, you pay long-term capital-- you know, there's very well-established tax rules that individuals are accustomed to following when it comes to stock investing.

Those same rules apply to crypto. It's just that it's been sort of the wild, wild west. And so consumers should be aware that if they have not already started to make sure that they're getting the right reports from their broker-- their crypto broker-- and reporting it on their tax returns and whatnot, they should start doing that or they'll, you know, potentially be subject to an audit going forward.

ALEXIS CHRISTOFOROUS: Do you think, though, that this means-- the fact that the government is standing up and taking notice, does this, in essence, legitimize the cryptocurrency industry? Because even lawmakers are now conceding, you know what? This is here to stay.

LISA ELLIS: Absolutely. I mean, as much as it may cause some short-term disruption because, you know, you can imagine some activity in the crypto investing world may drop off for a period of time when folks realize they have to pay their taxes, but over the long term, we view this as absolutely a positive. More crypto-- clarity around crypto regulation helps legitimize and mainstream crypto investing, opening up crypto investing to a much broader array of investors-- mainstream investors, mainstream investment vehicles, potentially. And over the longer term, absolutely, just the fact that the government is even doing this, you know, and like you said, lawmakers are well versed enough to be thinking of this and putting it in the infrastructure bill is certainly a very different place than we were in even three or four years ago, in terms of the mainstreaming and legitimizing of crypto.

KRISTIN MYERS: What about for companies, Lisa? As we've seen Tesla and others essentially start to purchase Bitcoin. How could this impact them?

LISA ELLIS: It's the same kind of idea. You have players like a Tesla, players like-- all large corporations hold on their balance sheet a certain amount of cash, right? They usually have, you know, many billions of dollars in cash that they need for working capital purposes, and they're always investing it in different ways. And many of them are starting to use Bitcoin and other crypto assets as just another alternative asset class that they have some of their cash parked in.

And it's the same-- you know, for them, it's kind of the same idea, meaning Tesla, Square, they're at the forefront of this. They're already comfortable. They're already doing it. But many, many, many other corporations are not. And so, you know, better regulation, better oversight, better clarity, better security around understanding transactions and having visibility into exactly who's on both sides of the transaction, we'll probably then see a much wider array of corporations start to include crypto assets as one of the investment asset classes they use, just like they may use all different forms-- commercial paper, right? They might put a portion of their cash in a whole diversified set of investments.

KRISTIN MYERS: All right, we'll leave that there. Lisa Ellis, partner at MoffettNathanson, thank you so much for joining us today.