Title: US IRS Introduces New Tax Reporting Regulations for Cryptocurrency Brokers
Introduction
In December 2024, the US Internal Revenue Service (IRS) released the final version of the Cryptocurrency Broker Tax Reporting Regulations, marking a new phase in the US cryptocurrency tax regime. Despite expectations of favorable cryptocurrency asset policies following Donald Trump’s election victory and pro-cryptocurrency stance, the recently introduced regulations have sparked significant controversy between regulatory bodies and stakeholders in the cryptocurrency industry. a16z Crypto has even supported lawsuits filed by the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council, accusing the IRS of overreach and potential violations of the law and constitution.
According to the IRS, the new rules aim to expand the tax base, combat tax evasion, and address money laundering and terrorist financing. However, concerns regarding the regulations are multi-faceted, including worries about data privacy breaches, increased centralization, and heightened tax burdens. Additionally, the industry is concerned that these regulations may stifle innovation in the US and lead to a talent exodus, as strengthened regulations may compel cryptocurrency businesses and professionals to choose more crypto-friendly jurisdictions. For ordinary investors/users, the introduction of the new regulations means more complex tax reporting. TaxDAO will elucidate the key aspects of these regulations, analyze their potential impact, and propose strategies from different perspectives.
2. Overview of Key Aspects of the New Regulations
On December 30, 2024, the Internal Revenue Service, a subsidiary of the US Department of the Treasury, released the final regulations regarding reporting cryptocurrency asset sales and transactions by brokers. The regulation, titled “Requirements for Reporting Total Broker Proceeds of Digital Asset Sales Services,” provides tax information reporting guidelines for brokers offering cryptocurrency asset sales and exchange services. It requires cryptocurrency companies falling under the category of brokers to submit tax information returns and relevant explanations. Of particular concern is that the new regulations qualify DeFi front-end platforms as cryptocurrency brokers and require them to report detailed tax information about users.
2.1 Scope of Brokers
The new regulations clearly define entities that should be classified as “brokers.” In the field of cryptocurrency asset trading, the following entities are considered brokers:
(1) Centralized exchanges: Platforms such as Coinbase that offer services for purchasing, selling, and trading cryptocurrency assets.
(2) Decentralized exchanges: Platforms like Uniswap that, despite being decentralized, are considered to play a broker role in cryptocurrency asset trading.
(3) Wallets with trading functionality: Wallets that allow users to directly purchase, sell, and trade cryptocurrency assets on their platforms, such as Metamask.
(4) Cryptocurrency ATMs and kiosks: This includes Bitcoin ATMs and other forms of cryptocurrency asset trading terminals.
Meanwhile, the following entities are not considered brokers:
(1) Blockchain maintainers: Including miners, node operators, etc., who are involved solely in maintaining the blockchain and not directly in transactions, hence not falling under the broker category.
(2) Non-transactional hardware wallets: Wallets that require connection to other exchanges to complete transactions, with their service providers not qualifying as brokers.
(3) Developers indirectly facilitating transactions: Software developers who develop software for exchanges and other platforms but do not directly participate in transactions.
(4) Non-active smart contract developers: Developers who derive income from smart contracts but are not responsible for their subsequent maintenance and updates.
2.2 Why are DeFi front-ends included within the regulatory scope?
According to the IRS, “trading front-end service” refers to services that:
(1) Accept user trade orders.
(2) Enable users to input transaction details through user interfaces, such as graphical or voice interfaces.
(3) Transmit these transaction details to the distributed ledger network for execution of transactions on the blockchain.
Even if DeFi front-ends themselves do not directly hold user funds or private keys, they still participate in the initiation and execution of transactions. Therefore, the IRS considers DeFi front-ends to play a role similar to traditional brokers in transactions and, thus, should assume corresponding reporting obligations. Furthermore, the IRS explicitly states that the addition of intermediate steps in the transaction process, such as through DeFi aggregators, does not change the fact that DeFi front-ends are regarded as brokers.
2.3 Obligations of Cryptocurrency Brokers
According to the “Requirements for Reporting Total Broker Proceeds of Digital Asset Sales Services,” cryptocurrency brokers have the following reporting obligations and other related duties:
(1) Submission of Information Reporting
Form 1099-DA: Starting from January 1, 2025, all brokers holding users’ sales of cryptocurrency assets must use the new Form 1099-DA to provide detailed reporting to the IRS on every transaction. The form requires disclosure of the following key information:
A. Total income from cryptocurrency transactions.
B. Information about the parties involved in the transaction (such as identity and address).
C. For each transaction, recording the transfer price of the asset and its cost basis.
(2) KYC Policies
To meet stringent reporting standards, brokers must fully implement Know Your Customer (KYC) policies to ensure the acquisition and verification of user identity information. If users are US taxpayers, brokers must comply with relevant tax reporting requirements.
(3) Monitoring and Recording of Transactions
Brokers need to establish systems to monitor and record all cryptocurrency-related transaction activities to ensure timely and accurate generation of required reports. This includes collecting, organizing, and storing transaction data for provision to the IRS when necessary.
(4) Anti-Money Laundering and Counter-Terrorist Financing MeasuresBrokers have an obligation to monitor and report suspicious transactions to help combat money laundering and terrorism financing activities. As important participants in the financial market, brokers possess transaction data and user information that serve as crucial foundations for anti-money laundering surveillance.
3. Impact on the Cryptocurrency Industry
3.1 Individual Investors
The new regulations aim to ensure that individual investors comply with cryptocurrency asset tax regulations. With the introduction of these regulations, investors can rely on brokers to obtain relevant information, making it easier to report earnings and tax situations. However, as a corresponding consequence, the risks of scrutiny and audits may increase, potentially surpassing people’s expectations.
Another consequence of the new regulations is that tracking the cost basis of cryptocurrency assets across multiple wallets and exchanges will become more complex. It is not uncommon for cryptocurrency users to hold assets on multiple exchanges or execute transactions on different platforms. To track the cost basis of all these mediums, the services of tax professionals and specialized tax reporting software are required.
3.2 Decentralized Platforms
Decentralized platforms operating in the United States and serving U.S. users will face the greatest challenges in adaptation. Clearly, stricter tax reporting requirements will compel these platforms to introduce new Know Your Customer (KYC) policies in their service offerings. From any perspective, this introduction threatens the fundamental basis or decentralized nature represented by the cryptocurrency asset field.
According to the new regulations, even decentralized platforms now need to disclose user personal transaction data, identification information, and other details. The anonymity features of these platforms are undoubtedly weakened. Although from a regulatory perspective, disclosing information is intended to combat money laundering and terrorist financing, from the user’s perspective, this may cause dissatisfaction and lead U.S. users to migrate to other platforms not bound by these rules.
Another impact of the regulations is the intensification of concerns about centralization. Under the new regulations, decentralized platforms are on the same starting line as centralized platforms, and the government will have the opportunity to control the operations of decentralized platforms and the transaction behavior of their users. Fundamentally, users will be completely exposed to regulators, and decentralized platforms will be greatly restrained, contradicting the initial intention of decentralization in the cryptocurrency industry.
3.3 Developers and Innovators in the Cryptocurrency Industry
Compared to the previous impacts, since the announcement of the regulations, the primary concern of the cryptocurrency industry has been whether the regulations will stifle innovation in the U.S. cryptocurrency asset field. The regulations may cause small or startup projects to exit the market due to the difficulties of bearing compliance costs, thereby intensifying market competition and industry reshuffling. Top projects may occupy a larger market share, but they also face stricter regulatory pressures. In the current situation, the regulations will force developers and innovators in the cryptocurrency industry to seek more suitable countries and regions.
3.4 Cross-Border Transactions
The implementation of the regulations may prevent non-U.S. exchanges and trading platforms from serving U.S. users. As a result, U.S. users may face limited trading options and more challenges when conducting cross-border cryptocurrency asset transactions. This in itself restricts the borderless nature of decentralized cryptocurrency assets and is not conducive to equal participation of people from all countries in DeFi and other fields. Additionally, these entities also face challenges in limited service and integration partnerships to improve user service and experience.
4. Strategies for Cryptocurrency Enterprises and Individuals
4.1 Collaboration with Tax Professionals
Obtaining professional support is crucial for enterprises to effectively implement reporting standards required by tax regulations. With the assistance of tax professionals, enterprises can ensure that their policies fully comply with the applicable regulatory requirements.
Given the constantly changing regulatory environment surrounding cryptocurrency assets, it is necessary for individual investors and cryptocurrency enterprises to consult cryptocurrency asset tax experts. Collaborating with such professionals ensures compliance with regulatory frameworks and maximizes the reduction of regulatory or tax evasion risks. Additionally, these experts can assist in mitigating penalties, reducing tax compliance risks, and identifying opportunities favorable to their own development within tax laws.
4.2 Utilizing Tax Reporting Software to Organize Cryptocurrency Asset Financial Records
Cryptocurrency asset investors can alleviate reporting burdens by maintaining detailed logs of transactions, transfers, etc. However, considering that cryptocurrency asset transactions often involve multiple wallets, exchanges, and blockchains, with large transaction volumes, individual investors and enterprises can utilize professional cryptocurrency asset financial management and tax reporting software like FinTax to facilitate tracking cost basis and calculating gains/losses.
4.3 Choosing Compliant Platforms
Strict tax reporting systems mean that IRS enforcement will become more rigorous. Therefore, it is recommended that U.S. cryptocurrency asset investors and enterprises limit their activities to platforms that comply with the new reporting requirements to avoid tax risks associated with non-compliant platforms.
4.4 Developing Appropriate Tax Strategies
Cryptocurrency asset investors can implement various tax strategies to minimize tax liabilities and ensure compliance with regulatory frameworks. These methods include tax loss harvesting, donating appreciated cryptocurrency assets, and managing gambling income, among others. However, investors should consult tax professionals before implementing these strategies.
5. Conclusion
As the implementation of broker regulations is still some time away, the cryptocurrency community may not immediately feel the impact of the regulations. However, the introduction of the new regulations will affect the cryptocurrency asset industry in the United States and globally, intensifying the tension between the cryptocurrency industry and U.S. regulatory agencies. It is worth considering that even though the United States hopes to effectively implement cryptocurrency asset tax systems and reduce tax evasion in this field, the proportional relationship between objectives and means should be taken into account. If the cost of implementing the tax system results in a heavy blow to DeFi and the entire cryptocurrency asset industry, such behavior will be akin to cutting off one’s nose to spite one’s face.
TaxDAO believes that in the future, the United States may provide a more lenient tax environment and more tax incentives for the cryptocurrency asset industry. However, this does not mean that the IRS will relax its collection of cryptocurrency asset taxes. On the contrary, a low tax burden and healthy tax system are often closely linked to strict enforcement systems. We will continue to monitor the implementation and subsequent effects of the regulations and share our latest insights in a timely manner.