New U.S. Crypto Asset Tax Reporting Regulations: Overview, Impact and Practical Tips

  1. Introduction

In December 2024, the Internal Revenue Service (IRS) released the final version of new crypto asset broker reporting regulations, marking a significant shift in the U.S. crypto tax regime.

In the context of Donald Trump’s election victory and his pro-crypto stance, many anticipated favorable crypto asset policies in the U.S. this year. Despite this optimism, the IRS’s recent regulations—Information Reporting for Brokers Providing Services for the Sale of Digital Assets—have heightened tensions between U.S. regulators and crypto stakeholders. Firms like a16z Crypto have backed lawsuits filed by organizations such as Blockchain Association, DeFi Education Fund, and Texas Blockchain Council, accusing the IRS of overreach, potential illegality, and even unconstitutionality.

According to the IRS, these new rules aim to broaden the tax base, combat tax evasion, and counter money laundering and terrorist financing. However, the rules have raised concerns about data privacy risks, centralization, and increased tax burdens. Additionally, the crypto industry fears these regulations may stifle innovation and lead to a talent exodus, as stricter regulations may push crypto enterprises and professionals toward more favorable jurisdictions. For everyday crypto investors and users, the new rules signify greater complexity in tax filing.

TaxDAO will outline the key aspects of these new regulations, analyze their potential impacts, and propose strategies from various perspectives.

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2.Key Points of the New Regulations

On December 30, 2024, IRS released its final regulation on broker reporting of digital asset sales and transactions. The regulation titled Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales provided guidelines on information reporting by brokers providing digital asset sales and exchanges. The regulation requires crypto entities that fall under the umbrella of brokers to file information returns and furnish payee statements. One of the most notable aspects of the regulation is its inclusion of DeFi front-end platforms under the definition of crypto brokers, requiring them to provide detailed tax reports for their users.

2.1 Definition of Brokers

The new regulations clearly define the entities considered “brokers” in the context of crypto asset transactions. These include:

1. Centralized exchanges (CEXs : Platforms like Coinbase that facilitate buying, selling, and trading of crypto assets.

2. Decentralized exchanges (DEXs) : Platforms like Uniswap, which, despite their decentralized nature, are considered brokers for facilitating crypto transactions.

3. Wallets with trading functionality : Wallets like Metamask that enable users to buy, sell, and trade crypto assets directly on their platform.

4. Crypto asset ATMs and kiosks : Bitcoin ATMs and other crypto transaction terminals.

Entities Excluded from the Definition of Brokers:

1. Blockchain maintainers : Miners, node operators, and others involved in blockchain maintenance but not direct transactions.

2. Non-transactional hardware wallets : Wallet providers requiring users to connect to external exchanges for transactions.

3. Developers facilitating transactions indirectly : Software developers creating platforms but not engaging in transactions themselves.

4. Inactive smart contract developers : Developers earning from smart contracts but not maintaining or updating them.

2.2 Why Are DeFi Front-Ends Included in Regulation?

Under the IRS regulations, “trading front-end services” refer to the following activities:

  1. Accepting users’ trade orders.

  2. Allowing users to input trade details via interfaces (e.g., graphical or voice).

  3. Transmitting trade details to distributed ledger networks for execution on a blockchain.

Even if DeFi front-ends do not directly hold user funds or private keys, their role in initiating and executing trades makes them similar to traditional brokers. Therefore, the IRS deems DeFi front-ends responsible for reporting. The IRS also clarified that additional steps in the trade process (e.g., aggregators) do not exempt DeFi front-ends from broker classification.

2.3 Duties of Crypto Brokers

Under the new regulation, crypto brokers must fulfill several obligations:

1. Information Reporting

1099-DA Form : Starting January 1, 2025, brokers must use the new 1099-DA form to report detailed transaction information to the IRS. Required disclosures include:

Total proceeds from crypto asset transactions.

Information about both parties (e.g., identity, address).

Transfer price and cost basis for each transaction.

2. KYC Policies

To comply with stringent reporting standards, brokers must implement comprehensive Know Your Customer (KYC) policies to verify user identities. For U.S. taxpayers, brokers must adhere to applicable tax reporting rules.

3. Transaction Monitoring and Record-Keeping

Brokers must establish systems to monitor and record all crypto asset transactions to ensure timely and accurate reporting. This includes collecting, organizing, and storing transaction data for IRS audits.

4. Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF)

Brokers are obligated to monitor and report suspicious transactions to combat money laundering and terrorism financing. As key participants in financial markets, brokers’ transaction and user data are crucial for AML efforts.

3.Impacts on the Crypto Community

3.1 Retail Investors :

From all indications, the regulation, as introduced by the IRS, broadens its tax coverage and ensures compliance from crypto entities and retail investors. Notably, the rules may equally affect investors on equal footing as they will investors, given tax liability and reporting requirements imposed on investors, alongside the dangers of facing tax evasion issues.

With the introduction of the regulations, it becomes easier for investors to report for gains and taxes as they could rely on the brokers to get this information. However, a counter-effect would be increased scrutiny and risk of audits, which could extend further than outright thought.

Another consequence of the newly introduced rules would be increased complexities in tracking cost basis across multiple wallets and exchanges. It is not strange to see crypto users holding assets across numerous exchanges or executing transactions on different platforms. Thus, having to track the cost basis for all these mediums would require services of tax professional and help of professional tax filing software to get through.

3.2 Decentralized Platforms :

Industry commentators predict decentralized platforms operating in the US and offering services to US-based users will face the most challenges in adapting. Clearly, the stricter tax reporting requirements would force these platforms to introduce new KYC policies in their service offerings. By all measures, such introductions threaten the fundamental underpinning of what the cryptocurrency space represents or the essence of decentralization in the first place.

With disclosures such as personal data now required, alongside social security numbers, the anonymity feature of using these platforms is undoubtedly eroded. Not only are the transactions made accessible to the authorities, but the user’s personal information is also divulged. On the regulatory purview, the disclosures combat money laundering and terrorism funding, but on the side of the user, it could occasion a disinterest that could lead to an erosion of US users from these platforms to others not subject to these rules.

Another effect of the regulations would be heightened centralization fears. Under the new regulations, decentralized platforms are on the same level as centralized platforms, giving governments the opportunity to control the operations of decentralized platforms and the transactions of their users. Fundamentally, users would be fully exposed to regulators, and decentralized platforms would face significant constraints, which goes against the original intent of decentralization in the crypto industry.

3.3 Developers and Innovators :

Compared to the former influence, since the unveiling of the rules, major concerns from industry participants and spectators have centered around how tax reporting rules could stifle innovation in the US crypto space. The new regulations could force small or startup projects out of the market due to their inability to bear compliance costs, further intensifying market competition and industry consolidation. Leading projects may secure larger market shares but will simultaneously face increased regulatory pressure. In the current scenario, the new regulations will compel developers and innovators to seek more favorable environments for their innovations.

3.4 Cross-Border Transactions :

The introduction of the regulations could deter non-U.S. exchanges and trading platforms from serving American clients. Thus, American users may face limited transaction options and more challenges in executing cross-border transactions. This is also a restriction on the borderless nature of decentralized crypto assets, and is not conducive to the equal participation of people from all countries in areas such as DeFi. Moreover, the entities face the challenge of limited partnerships for their services and integration to improve customer service and experience.

4.Practical Tips for the Crypto Community to Prepar

4.1 Working with Tax Professionals

The continuously evolving regulatory landscape surrounding cryptocurrency necessitates that investors and business owners consult experts specializing in digital asset taxation. Engaging with such professionals ensures compliance with regulatory frameworks, thereby minimizing the risk of oversight or tax evasion. Furthermore, these experts can assist in mitigating penalties, reducing the likelihood of audits, and identifying opportunities within the tax code that may benefit taxpayers.

Obtaining professional support is essential for companies to implement the reporting standards mandated by taxation regulations effectively. With the assistance of tax professionals, organizations can ensure that their policies fully comply with applicable regulatory requirements.4.2 Use Tax Filing Software to Organize Crypto Asset Financial Records

4.2 Organizing Crypto Asset Records with Tax Software

Crypto asset investors can ease the reporting burden by maintaining detailed logs of transactions, transfers, staking rewards, and NFT sales. However, considering that crypto transactions often involve multiple wallets, exchanges, and blockchains, with a high volume of trades, specialized crypto tax management and reporting software like FinTax can be used. These tools help track cost basis and calculate gains/losses efficiently.

4.3 Choosing Compliant Platforms

The strict taxation regime implies more rigorous enforcement by the IRS as the agency doubles down on achieving its objectives. Therefore, cryptocurrency investors and developers are advised to restrict their activities to platforms whose operations align with the new reporting requirements. Through this, they can avoid the risks of using non-compliant platforms.

4.4 Developing Proper Tax Strategies

Cryptocurrency investors can implement various tax strategies to minimize liabilities and ensure compliance with regulatory frameworks. Such methods include tax-loss harvesting, donating appreciated crypto assets, and managing staking income. However, investors should consult with tax professionals before effecting these strategies.

5.Conclusion

With the broker rules months away from implementation, the cryptocurrency community may not immediately feel the effect of the rules. The introduction of the broker rules will, however, impact digital assets transactions in the United States and may heighten the tension between regulators in the United States. It is worth considering that while the U.S. may aim to effectively implement a crypto asset tax system and reduce tax evasion in this sector, attention should also be paid to the proportionality between the objectives and the methods. If the cost of enforcing the tax system results in a heavy blow to DeFi and the entire crypto asset industry, such actions would be equivalent to to kill the goose that lays the golden egg.

TaxDAO believes that, in the future, the U.S. may provide a more favorable tax environment and greater tax incentives for the crypto industry. However, this does not imply that the IRS will ease its efforts to collect taxes on crypto assets. On the contrary, a low-burden, healthy tax regime is often closely tied to rigorous enforcement mechanisms. We will continue to monitor the implementation of the new regulations and their subsequent impact, sharing our latest insights promptly.

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