Author:TaxDAO
1. Introduction
In December 2024, the U.S. Internal Revenue Service (IRS) released the final version of the new tax reporting rules for crypto asset brokers, marking a new phase in the U.S. crypto asset tax system.
Against the backdrop of Donald Trump’s election victory and crypto asset-friendly stance, it was widely believed that the United States would usher in favorable crypto asset policies this year. Despite the optimism, the IRS’s recent “Gross Receipts Reporting Requirements for Brokers Who Regularly Provide Digital Asset Sales Services” directly exacerbated tensions between U.S. regulators and crypto asset stakeholders. a16z Crypto even supports the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council in filing lawsuits, accusing the IRS of overstepping its authority, violating laws, and even violating the constitution. According to the IRS, the new rules are designed to expand the tax base, address tax evasion, and combat money laundering and terrorist financing. However, people's concerns about the new rules are multifaceted, including concerns about data privacy leaks, increased centralization, and increased tax burdens. In addition, the industry is also concerned that these regulations may stifle innovation in the United States and lead to a loss of talent, as increased regulation will force crypto companies and practitioners to choose more friendly jurisdictions. For ordinary investors/users, the introduction of the new rules means more complicated tax filings. TaxDAO will explain the main content of this new rule, analyze its potential impact, and propose countermeasures from different angles.
2. Overview of the main contents of the new regulations
On December 30, 2024, the IRS under the U.S. Treasury Department issued final regulations on broker reports on crypto asset sales and transactions. The regulation, entitled "Gross Income Reporting Requirements for Brokers Who Regularly Provide Digital Asset Sales Services," provides tax information reporting guidance for brokers who provide crypto asset sales and exchanges, and requires crypto companies that fall into the category of brokers to submit tax information returns and related explanations. The most noteworthy aspect of this new regulation is that it also characterizes DeFi front-end platforms as crypto asset brokers, requiring them to report users' tax information in detail.
2.1 Scope of Brokers
The new regulations clearly define which entities should be classified as "brokers." In the field of crypto-asset trading, the following types of entities are considered brokers: (1) Centralized exchanges: For example, platforms such as Coinbase, which provide services for buying, selling and trading crypto-assets. (2) Decentralized exchanges: Such as Uniswap, which, despite being decentralized, are still considered to play the role of brokers in crypto-asset trading. (3) Wallets with trading functions: These are wallets that allow users to buy, sell and trade crypto-assets directly on their platforms, such as Metamask. (4) Crypto-asset ATMs and trading kiosks: This includes Bitcoin ATMs and other forms of crypto-asset trading terminals.
At the same time, the following entities are not considered brokers:
(1) Blockchain maintainers: including miners, node operators, etc., who only participate in the maintenance of the blockchain and are not directly involved in transactions, and therefore are not brokers.
(2) Non-transactional hardware wallets: those wallets that need to connect to other exchanges to complete transactions, whose service providers are not considered brokers.
(3) Developers who indirectly facilitate transactions: software developers who develop software for platforms such as exchanges but do not directly participate in transactions.
(4) Inactive smart contract developers: developers who receive income from smart contracts but are not responsible for their subsequent maintenance and updates.
2.2 Why is the DeFi front end also within the scope of regulation?
According to the IRS, a “trading front-end service” is a service that: (1) receives trading orders from users; (2) enables users to enter trading details through a user interface (such as a graphical interface or voice interface); and (3) transmits these trading details to a distributed ledger network so that the transaction can be executed on the blockchain.
Even if the DeFi front-end itself does not directly hold the user's funds or private keys, it still participates in the process of initiating and executing transactions. Therefore, the IRS believes that the DeFi front-end plays a role similar to that of a traditional broker in transactions and should bear corresponding reporting obligations. In addition, the IRS made it clear that even if an intermediate step is added to the transaction process (such as through a DeFi aggregator), it does not change the fact that the DeFi front end is considered a broker. 2.3 What obligations do crypto asset brokers have? Pursuant to the "Gross Income Reporting Requirements for Brokers Who Regularly Provide Digital Asset Sales Services", crypto asset brokers need to assume the following reporting obligations and other related obligations: (1) Submit information report Form 1099-DA: Starting January 1, 2025, all brokers who hold users selling crypto assets must use the new Form 1099-DA to report the core details of each transaction to the IRS. The basic information required to be disclosed in this form includes: A. Total revenue from crypto asset transactions. B. Information of both parties to the transaction (such as identity and address). C. For each transaction, the transfer price and cost basis of the asset must be recorded. (2) KYC Policy In order to meet strict reporting standards, brokers must fully implement KYC policies to ensure that they can obtain and verify the user's identity information. If the user is a US taxpayer, the broker must comply with relevant tax reporting requirements.
(3) Monitoring and Recording Transactions Brokers need to establish systems to monitor and record all trading activities involving crypto assets to ensure that the required reports can be generated in a timely and accurate manner. This includes collecting, organizing and storing transaction data so that it can be provided to the IRS when necessary.
(4) Anti-Money Laundering and Anti-Terrorist Financing Brokers are obliged to monitor and report suspicious transactions to help combat money laundering and terrorist financing activities. As important participants in the financial market, the transaction data and user information held by brokers are an important data basis for anti-money laundering monitoring.
3. Impact on the Crypto Industry
3.1 Individual Investors
The new regulations seek to ensure that individual investors comply with crypto asset tax regulations. After the new regulations are introduced, investors can rely on brokers to obtain relevant information, making it easier to report gains and taxes. However, corresponding to this, the risk of review and audit will also increase, which may be beyond people's imagination.
Another consequence of the new regulations is that it will become more complicated to track the cost basis of crypto assets across multiple wallets and exchanges. It is not uncommon for crypto asset users to hold assets on numerous exchanges or execute transactions on different platforms, and if the cost basis of all these mediums is to be tracked, the services of tax professionals and the help of professional tax filing software are required to complete it.
3.2 Decentralized Platforms
Decentralized platforms operating in the United States and providing services to U.S. users will face the greatest challenges in adapting. Obviously, stricter tax reporting requirements will force these platforms to introduce new KYC policies in their service products. No matter from which angle you look at it, such an introduction will threaten the fundamental basis or decentralized nature represented by the crypto asset space.
According to the new regulations, even decentralized platforms are now required to disclose users' personal transaction data, identity proof and other information, and the anonymity characteristics of these platforms have undoubtedly been weakened. Although from a regulatory perspective, the disclosure of information is intended to combat money laundering and the financing of terrorism, from a user perspective, this may cause user disgust and lead to the loss of U.S. users from these platforms to other platforms that are not subject to these rules.
Another impact of the regulations is that they have heightened 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 operation of decentralized platforms and the trading behavior of their users. Fundamentally, users will be completely exposed to regulators, and decentralized platforms will also be greatly constrained, which goes against the original intention of decentralization in the crypto industry.
3.3 Developers and innovators in the crypto industry
Compared with the previous impacts, since the announcement of the rules, the main concern of the crypto industry has focused on whether the new regulations will stifle innovation in the US crypto asset field. The new regulations may cause small or start-up projects to exit the market due to unbearable compliance costs, thereby intensifying market competition and industry reshuffles. Head projects may occupy a larger market share, but at the same time they will also face stricter regulatory pressure. Under the current circumstances, the new regulations will force developers and innovators within the crypto industry to move to more appropriate countries and regions. 3.4 Cross-border Transactions The introduction of new regulations may prevent non-US exchanges and trading platforms from providing services to US users. Therefore, US users may face limited trading options and more challenges when performing cross-border crypto asset transactions, which in itself is a restriction on the borderless nature of decentralized crypto assets and is not conducive to equal participation of people from all countries in areas such as DeFi. In addition, these entities also face the challenge of limited services and integration partnerships to improve user services and experience.
4. Responses for crypto companies and individuals
4.1 Cooperation with tax professionals
Obtaining professional support is essential for companies to effectively implement the reporting standards required by tax regulations. With the assistance of tax professionals, companies can ensure that their policies are in full compliance with applicable regulatory requirements.
The regulatory environment surrounding crypto assets is constantly changing, and it is necessary for individual investors and crypto companies to consult crypto asset tax experts. Working with such professionals ensures compliance with the regulatory framework, thereby minimizing the risk of regulation or tax evasion. In addition, these experts can assist in mitigating penalties, reducing the risk of tax violations, and identifying opportunities in tax laws that may be beneficial to their own development.
4.2 Use tax reporting software to organize crypto asset financial records
Crypto asset investors can reduce the reporting burden by keeping detailed logs of transactions, transfers, etc. However, considering that crypto asset transactions often involve multiple wallets, exchanges, and blockchains, and the number of transactions is large, individual investors and enterprises can use professional crypto asset financial management and tax reporting software such as FinTax to facilitate tracking cost basis and calculating gains/losses.
4.3 Choose a compliant platform
A strict tax reporting system means that the IRS will enforce the law more strictly. Therefore, it is recommended that crypto asset investors and crypto enterprises in the United States limit their activities to platforms that meet the new reporting requirements to avoid the tax risks brought by non-compliant platforms themselves.
4.4 Developing an Appropriate Tax Strategy
Cryptoasset investors can implement various tax strategies to minimize the amount of tax payable and ensure compliance with the regulatory framework. These methods include tax loss harvesting, donating appreciated crypto assets, and managing staking income. However, investors should consult a tax professional before implementing these strategies.
5. Conclusion
Since there is still some time before the implementation of the broker rule, the crypto community may not feel the impact of the rule immediately. However, the introduction of the new rule will affect the cryptoasset industry in the United States and around the world, and will increase tensions between the cryptoasset industry and U.S. regulators. It is worth thinking about that even if the United States hopes to effectively implement the cryptoasset tax system and reduce tax evasion in this field, it should also pay attention to the proportionality between ends and means. If the cost of implementing the tax system is a heavy blow to DeFi and even the entire crypto asset industry, then this behavior is tantamount to exhausting the pond to catch fish. TaxDAO believes that in the future, the United States may provide a more relaxed tax environment and more tax incentives for the crypto asset industry, but this does not mean that the IRS will relax the collection of crypto asset taxes. On the contrary, a low-tax and healthy tax system is often closely linked to a strict enforcement system. We will continue to pay attention to the implementation and subsequent impact of the new regulations and share our latest views in a timely manner.
Brian
Weiliang
Joy
Alex
Miyuki