In today’s episode of Adam Talks, Adam Bergman, Esq. discusses two new IRS rules – the catch-up contribution rules for 401(k) plans, and a proposal to force crypto dealers to report transactions.
Two New IRS Rules on Roth 401(k)s & Cryptos You may have Missed
Adam Bergman, founder of IRA Financial, discusses two new IRS rules that may have been overlooked by individuals during the summer. The first rule pertains to catch-up contributions in Roth 401(k) plans. Currently, individuals over the age of 50 can make catch-up contributions to their traditional 401(k) plans with pretax funds. However, starting in 2026, the rule will change, and catch-up contributions for individuals over 50 will have to be made in Roth instead of pretax. This change aims to limit tax deductions and increase tax revenue.
The IRS decided to delay the implementation of the new rule on catch-up contributions in Roth 401(k)s until 2026 because taxpayers and financial institutions were not adequately prepared for the change. This delay allows more time for software, procedures, and policies to be put in place to accommodate the new rule.
The second rule focuses on cryptocurrencies. The IRS is proposing a rule that will require dealers, cryptocurrency exchanges, payment processors, and other entities dealing with cryptocurrencies, to report crypto transactions. The IRS believes that there is significant tax revenue being missed due to under-reporting of crypto transactions. This proposed rule, which is seeking public comments, is expected to go into effect in 2026. It may have a significant impact on the decentralized finance (DeFi) industry, which currently does not provide data or information to the IRS.
The proposed rule on cryptocurrencies is part of the IRS’s effort to crack down on tax evasion related to cryptocurrencies, and it is expected to provide the IRS with more information and power to enforce tax compliance.
Bergman suggests that the increased IRS scrutiny on cryptocurrencies may drive more individuals to invest in cryptocurrencies through Self-Directed IRAs. By doing so, investors can potentially avoid IRS reporting requirements and enjoy tax-free growth on their crypto investments. Additionally, since cryptocurrencies are often viewed as long-term investments, aligning well with the typical long-term horizons of IRAs, this strategy of investing in cryptocurrencies within IRAs may become more popular.
Bergman explains the tax benefits of utilizing individual retirement accounts (IRAs) for trading cryptocurrencies, such as avoiding income tax and short-term capital gains tax. He suggests that the IRA industry will likely grow as more crypto investors realize these benefits. He also mentions the complexity of determining gains and suggest using specific accounting methods for easier calculations.
The conversation shifts to the government’s focus on cryptocurrencies, with Bergman predicting increased attention from Congress and the Senate, as well as the IRS and Treasury pushing for improved reporting and compliance to generate more revenue. Regulatory measures are expected to target tax cheaters and increase scrutiny on exchanges, brokers, and payment processors. It is emphasized that even DeFi exchanges may still require taxpayers to pay taxes, as the IRS will have access to necessary data.
In conclusion, these two IRS rules aim to increase tax revenue by limiting tax deductions and improving reporting requirements for cryptocurrency transactions. Bergman suggests that the increased IRS scrutiny on cryptocurrencies may drive individuals to invest in cryptocurrencies through IRAs to mitigate IRS reporting and tax liability concerns. He also mentions the extension of the Roth catch-up provision until 2026 and the IRS’s increased focus on obtaining information from crypto investors. He advises caution when using DeFi platforms and awareness of associated tax obligations.
To learn more about these two rules, listen to this week’s episode!