Author | TaxDAO
Related news 1:
IRS Releases Digital Asset Reporting Rules, Calls Front-End Service Providers Brokers
By Ana Paula Pereira
News Summary: Recently, the U.S. Internal Revenue Service (IRS) issued final regulations on brokers reporting digital asset sales and transactions, marking another escalation of U.S. tax supervision on crypto assets. Starting January 1, 2025, all brokers (including crypto asset trading platforms, payment processors, and custodial wallet providers) who hold digital assets for sale to customers must use the new 1099-DA form to report the core details of each transaction to the IRS in detail. At the same time, DeFi front-end service providers are also identified as crypto asset brokers and need to assume the aforementioned tax reporting obligations.
Related news 2:
a16z Crypto supports lawsuit against U.S. Treasury Department over new regulations, saying they threaten DeFi innovation
Author: Wu said blockchain
News Summary: On December 29, 2024, Michele Korver, head of regulation at a16z Crypto, tweeted that the new broker reporting rules released by the U.S. Treasury yesterday posed a direct threat to the development vision of DeFi and could hinder the future of DeFi innovation in the U.S. To this end, a16z Crypto supported the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council in filing a lawsuit, accusing the U.S. Internal Revenue Service and the Treasury Department of exceeding their statutory authority, violating the Administrative Procedure Act (APA), and even unconstitutional.
TaxDAO Review
Overview of the Evolution of Crypto-Asset Tax Regulation and Reporting Requirements in the United States
Looking back at the history of US tax regulation of crypto assets, its evolution path is relatively clear. In 2014, the IRS issued Notice 2014-21, which officially defined cryptocurrency as property rather than currency, and established a corresponding tax treatment framework. In 2021, the signing of the Infrastructure Investment and Jobs Act (IIJA) required that all transactions involving crypto assets must be reported, and introduced Form 8300, which expanded crypto asset transactions to the reporting scope of Form 1099, and raised the tax regulation of crypto asset transactions to a new level. With the recent finalization of the IRS draft on brokers reporting digital asset sales and transactions, the US tax regulation of crypto assets has entered an unprecedentedly strict stage.
The “Gross Income Reporting Requirements for Brokers Who Regularly Provide Digital Asset Sales Services” (hereinafter referred to as the “Reporting Requirements”) is an important document developed by the U.S. Internal Revenue Service (IRS) to regulate tax reporting on digital asset transactions. The Reporting Requirements elaborates on a series of tax reporting regulations that brokers must follow when providing digital asset sales and trading services to clients. It clarifies the definition of brokers and includes traditional digital asset trading platforms, payment processors, custodial wallet providers, and decentralized finance (DeFi) service providers that automatically execute transactions through software or smart contracts. This means that even if a DeFi platform does not directly hold customer private keys or digital assets, as long as it provides core services such as trading interfaces, order processing and execution, it must comply with the corresponding tax reporting regulations. In addition, the Reporting Requirements also specifies specific matters such as the content and format of the report, the time and frequency of the report, etc., providing clear operational guidance for brokers, and also providing a basis for the IRS to monitor digital asset trading activities and supervise tax compliance.
Form 1099-DA is a tool used by the IRS to deal with the increasing frequency of crypto asset transactions and the difficulty of tax supervision. Its comprehensiveness and detailedness are remarkable. This form not only requires brokers to disclose the date and type of transactions (such as buying, selling, exchanging, etc.) in detail, but also accurately report the transaction amount, covering the total income and possible gains, losses and cost basis information. It is particularly critical that brokers provide comprehensive information of investors, including name, address, social security number, and extend to the specific type, quantity and fair market value of digital assets.
Good medicine tastes bitter, a necessary step?
The introduction of the new regulations has put forward stricter tax reporting requirements for crypto asset brokers. In order to meet the strict reporting standards, brokers must fully implement KYC (Know Your Customer) policies, which will significantly increase their operating costs and make compliance more difficult, and the entire industry is facing new challenges.
From the perspective of anti-money laundering, the lack of transparency of crypto assets may constitute a loophole in the financial defense line. Money laundering activities will disrupt the normal order of the financial market and provide financial cover for various criminal activities. As an important participant in the financial market, the transaction data and customer information held by brokers are an important data basis for anti-money laundering monitoring. Strict reporting requirements can help to timely detect and block money laundering routes, thereby curbing the breeding and spread of financial crimes.
The low transparency of crypto assets may also cause problems in countering terrorist financing. Terrorist financing is the economic basis for the continuation and expansion of terrorist activities. As participants in financial activities, brokers have the obligation and ability to monitor and report suspicious transactions and provide key intelligence to counter-terrorism departments to cut off the source of terrorist funds and maintain national security and social stability.
In terms of anti-tax evasion, the reporting requirements of crypto asset brokers are also particularly important. Tax evasion will weaken the country's fiscal foundation and undermine tax fairness and market order. As a part of the tax collection and management system, the reporting obligations followed by brokers help tax authorities accurately identify tax evasion, strengthen tax management, and maintain the fairness and authority of the tax system. Therefore, improving the transparency of crypto assets through reporting requirements for brokers is an important measure to deal with these potential problems.
Compliance pains or deadly poison?
The Reporting Requirements have had a significant impact on the DeFi sector. With its decentralization and anonymity, DeFi provides flexible and efficient financial services outside the traditional financial system. However, the strengthening of supervision may seriously challenge these characteristics. On the one hand, the 1099-DA form requires brokers to disclose investors' wallet addresses and transaction volumes. The implementation of the resulting KYC policy will weaken the anonymity of DeFi, forcing investors to change their trading habits, provide real identity information, and reduce transaction privacy. On the other hand, in order to meet the reporting requirements, DeFi platforms need to increase resources and energy investment to collect, organize and report user transaction data, which will undoubtedly increase operating costs, indirectly affect the autonomous operation of smart contracts, increase the links of human intervention, and have an adverse impact on the autonomous operation and decentralized governance of smart contracts. More importantly, the Reporting Requirements may have a far-reaching impact on the DeFi ecosystem. It challenges DeFi's core mission to popularize the ease of use of currency and payment methods and promote the globalization and decentralization of financial services. If DeFi becomes transparent and de-anonymized, its market appeal and development potential will be greatly reduced.
The "Reporting Requirements" not only affect DeFi, but also stir up waves in the entire crypto industry. The new regulations put crypto asset brokers under the dual pressure of compliance and operating costs, forcing them to devote more resources to meet regulatory requirements. This may cause small or start-up brokers to withdraw due to unbearable conditions, and intensify market competition and industry reshuffles. At the same time, the new regulations have triggered disputes over privacy, data security and constitutional rights; the new regulations also pose a potential threat to the innovation and development of the crypto industry. The crypto industry urgently needs a relaxed and flexible regulatory environment to stimulate innovation. However, the compliance pressure and increased costs brought about by the new regulations may suppress the industry's innovative momentum.
To some extent, the crypto broker rule is like a bitter medicine, aimed at improving tax transparency, cracking down on illegal activities, and ensuring tax fairness and market order. However, its urgency of operation also makes people worry whether it will become a deadly poison that puts the crypto industry in a desperate situation. It is undeniable that the implementation of this rule is indeed a bit hasty. In the context of the rapid development of the crypto industry, how to find a balance between encouraging innovation and strengthening supervision is an urgent problem to be solved. In addition, considering the Trump administration's pro-crypto asset attitude, perhaps Trump will veto the regulation before the effective date of the "Reporting Requirements" to reserve a more relaxed development space for the crypto industry.
Of course, we must face the fact that if this rule comes into effect, it will inevitably bring a certain impact to the decentralized finance (DeFi) industry. As an emerging force in the crypto field, decentralized finance is centered on decentralization and autonomous operation, and the strengthening of tax reporting requirements will undoubtedly increase the operating costs and compliance difficulties of DeFi platforms, and may even force them to change their original business models. However, this may be the pain that the crypto industry must go through in its growth process. Historically, the crypto industry has always shouldered the mission of decentralization, and the centralized supervision of the government has always been an unavoidable pressure in its development. Although each strengthening of supervision may cause the industry to experience some twists and turns, the resilience and innovation ability shown by the crypto industry can always allow it to rise from the ashes. Although the future development path is full of uncertainty, the crypto industry still has broad prospects and unlimited possibilities.
