The US Treasury Department published a proposed rule that would require cryptocurrency brokers, including exchanges and payment processors, to report new user information concerning digital asset sales and exchanges to the Internal Revenue Service (IRS).
This move is part of a broader effort by Congress and regulatory bodies to crack down on crypto users potentially evading taxes.
The Treasury Department introduced a new tax reporting form named Form 1099-DA. This form aims to aid taxpayers in determining their tax liabilities and simplify the process for crypto users by avoiding complex calculations to assess gains.
Furthermore, the proposed rule seeks to subject digital asset brokers to the same information reporting regulations as brokers dealing with other financial instruments such as stocks and bonds.
According to the proposal, the definition of a “broker” would encompass both centralized and decentralized digital asset trading platforms, crypto payment processors, and specific online wallets used for storing digital assets. The rule would apply to various cryptocurrencies, including bitcoin and ether, as well as non-fungible tokens.
Under this proposal, brokers would be required to furnish these forms to both the IRS and the holders of digital assets to aid them in their tax preparations.
The origins of these new requirements trace back to the 2021 Infrastructure Investment and Jobs Act, a $1 trillion legislation, which included a provision to enhance tax reporting obligations for digital asset brokers. The IRS was tasked with defining qualifying crypto broker firms and providing forms and guidelines for reporting.
legislation expanded reporting mandates
Meanwhile, the legislation also expanded reporting mandates to encompass certain cash transactions exceeding $10,000 and involving digital assets.
During the passage of the bill, it was projected that these new regulations could generate around $28 billion in revenue over a decade.
The Treasury Department’s proposal stipulates that these rules would apply to brokers from 2025 for the tax filing season of 2026.
The Treasury expressed, “This is part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules.”
The cryptocurrency industry reacted with mixed responses to this proposal. CEO of the Blockchain Association, Kristin Smith, stated that if executed correctly, the new rules “could help provide everyday crypto users with the necessary information to accurately comply with tax laws.”
However, the CEO of the DeFi Education Fund, Miller Whitehouse-Levine, criticized the proposed approach, claiming it wouldn’t simplify tax filing or enhance tax compliance. He remarked, “Today’s proposal from the IRS is confusing, self-refuting, and misguided. It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don’t exist.”
The IRS mandates that crypto users report
Presently, the IRS mandates that crypto users report various digital asset activities, including cryptocurrency trading, on their tax returns, irrespective of whether these transactions resulted in gains. Users are responsible for performing these calculations themselves, as the platforms facilitating digital asset trades do not provide this information to the IRS.
A group of Democratic senators, led by Elizabeth Warren, penned a letter earlier in the month, urging the swift implementation of these rules by the Treasury. They argued that without such action, tax evaders and crypto intermediaries would continue exploiting the system.
The Treasury Department and the IRS are seeking feedback on this proposal until October 30. Moreover, they have scheduled public hearings regarding the proposal for November 7-8.
