The IRS has released final regulations for tax reporting on digital asset sales and exchanges. | Credit: Sarah Silbiger for The Washington Post via Getty Images
Key Takeaways
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.
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.
CRYPTO BROKER REPORTING REGS FINALIZED
On Friday, June 28, Treasury and the IRS issued final regs under tax code section 6045 requiring custodial brokers to report dispositions of digital assets to the seller and the IRS on Form 1099-DA.
A summary 🧵 of key points (1/27) …
— CryptoTaxGuy.ETH 🦇🔊🛡️ (@CryptoTaxGuyETH) July 1, 2024
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.”
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.”
Treasury has finalized its proposed broker rule and appears to have punted on DeFi completely at this stage.
While "the Treasury Department and the IRS do not agree that non-custodial industry participants should not be treated as brokers… the Treasury Department and the IRS… https://t.co/wKz2QlcSh3
— Miller (@millercwl) June 28, 2024
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.”
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.
7 years after the DAO report — which the SEC claims provided clarity to crypto — the SEC is still litigating 8 major crypto cases in federal courts with no end in sight. Something’s broken.
— Stuart Alderoty (@s_alderoty) March 30, 2024
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.
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.
In regards to FIT 21, @RepCasar (D, TX) expresses concerns to @CFTCbehnam regarding digital assets compared to farming etc… "this other industry (crypto).. I worry about setting up the American people." Behnam rejects the characterization and says "there's a need to act" and… pic.twitter.com/aJuS5718r6
— blockchain tipsheet (@blockchaintpsht) March 6, 2024
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.
