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US Treasury and IRS Crack Down on Crypto Tax Evasion with New Final Regulations

Published July 1, 2024 11:05 AM
Teuta Franjkovic
Published July 1, 2024 11:05 AM

Key Takeaways

  • The IRS has released final regulations for tax reporting on digital asset sales and exchanges.
  • While most crypto platforms need to comply with the new reporting requirements, non-custodial entities like decentralized exchanges are temporarily exempt.
  • Despite clarifications, concerns persist about potential overreach and the feasibility of compliance for some entities.

The US Department of the Treasury and the IRS have unveiled  final regulations for tax reporting concerning digital asset transactions.

This development is part of the Biden-Harris administration’s efforts  to implement the Infrastructure Investment and Jobs Act. Additionally, the Treasury and the IRS have announced plans to issue additional regulations later this year, which will set reporting requirements for non-custodial brokers.

Final Regulations Released for Tax Reporting on Crypto Sales and Exchanges

The US Department of the Treasury and the Internal Revenue Service (IRS) recently announced the release of final regulations  that implement bipartisan tax reporting requirements for selling and exchanging digital assets. These regulations are a part of the Biden-Harris administration’s execution of the Infrastructure Investment and Jobs Act (IIJA) .

The announcement clarified that owners of digital assets have always been required to pay taxes on gains from their sale or exchange. The IIJA did not introduce new taxes on digital assets; instead, it established reporting requirements that align with those existing for traditional financial services. The Treasury and the IRS provided detailed explanations of these new regulations.

According to  the both parties:

“The final regulations announced today will require brokers to report gross proceeds on the sale of digital assets beginning in 2026 for all sales in 2025. Brokers will be required to also report information on the tax basis for certain digital assets beginning in 2027 for sales in 2026.”

New IRS Rules Require Crypto Reporting, Non-Custodial Exempt

The latest regulations from the IRS mandate that crypto trading platforms, hosted wallet services, and digital asset kiosks report customer asset movements and gains. These disclosures will, under limited circumstances, also apply to stablecoins like Tether’s (USDT) and Circle Internet Financial’s (USDC), as well as high-value non-fungible tokens (NFTs). However, the IRS has decided not to resolve the ongoing debate over whether tokens should be classified as securities or commodities.

The regulations primarily target well-known platforms such as Coinbase Inc. (COIN) and Kraken. Meanwhile, non-custodial crypto entities, including decentralized exchanges and providers of unhosted wallets, will receive a temporary exemption from these new reporting requirements.

The IRS argues that platforms handling the majority of crypto transactions can no longer delay compliance with these rules, but acknowledges that other issues require further examination and will be addressed in a separate regulation to be introduced later this year.

Furthermore, the parties explained :

“The Treasury Department and the IRS do not agree that non-custodial industry participants should not be treated as brokers. However, the Treasury Department and the IRS would benefit from additional consideration of issues involving non-custodial industry participants.”

IRS Finalizes Long-Awaited Crypto Tax Reporting Rules

A 2021 infrastructure bill in Congress  laid the groundwork for the Treasury’s IRS to formalize its approach to cryptocurrency regulation. Since then, the industry has expressed frustration over the repeatedly delayed process. When the proposal was eventually introduced, it attracted significant public interest, drawing 44,000 comments.

The Treasury and IRS are expected to introduce further regulations later this year that will set reporting requirements for non-custodial brokers, in line with statutory mandates.

Acting Assistant Secretary for Tax Policy Aviva Aron-Dine stated :

“Because of the bipartisan Infrastructure Investment and Jobs Act, investors in digital assets and the IRS will have better access to the documentation they need to easily file and review tax returns. By implementing the law’s reporting requirements, these final regulations will help taxpayers more easily pay taxes owed under current law, while reducing tax evasion by wealthy investors.”

IRS Clarifies Crypto Broker Definition in Final Tax Rules Amid Industry Concerns

The development of this contentious tax rule has raised significant concerns within the industry about potential overreach by the US government. There are fears that the regulations could impose unfeasible requirements on miners, online forums, software developers, and other entities that assist investors but traditionally wouldn’t be categorized as brokers. These groups often lack both the customer information and the disclosure infrastructure necessary for compliance.

In response, the IRS has clarified  that the definition of crypto brokers should not encompass entities “providing validation services without offering other functions or services, or persons solely engaged in selling certain hardware or licensing certain software.” The stated purpose of this hardware or software is exclusively to allow users to manage private keys used to access digital assets on a distributed ledger.

US tax regulators estimate that the new rule will impact approximately 15 million individuals and require around 5,000 firms to comply.

On Friday, the IRS emphasized that the new rule regarding the classification of crypto assets is not intended to take sides in the ongoing debate within the industry about whether tokens should be considered securities or commodities. This issue is currently being contested in several cases before federal judges. While the SEC has recognized that Bitcoin (BTC) falls outside its jurisdiction, the Commodity Futures Trading Commission Chair, Rostin Behnam, has declared that Ethereum’s Ether (ETH) is also a commodity.

The IRS stated that adopting a stance on this matter “is outside the scope of these final regulations,” indicating that their focus is strictly on tax compliance rather than defining the regulatory nature of digital assets.

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