IRS Drafts New Crypto Tax Reporting Rules

The Internal Revenue Service (IRS) has unveiled a preliminary version of Form 1099-DA, aimed at brokers and exchanges involved in digital asset transactions. This early release offers a glimpse into potential categorizations and reporting obligations for various operators within the cryptocurrency sector.

The draft highlights distinct types of brokers including kiosk operators, digital asset payment processors, and hosted and unhosted wallet providers, among others. It mandates the disclosure of a “digital asset address” and clarifies the status of the asset as a “noncovered security.” This distinction is crucial as it determines the level of reporting required under the new guidelines.

Emerging from the legislative framework of the Infrastructure Investment and Jobs Act of 2021, which explicitly included provisions to enhance the reporting of cryptocurrency transactions, these rules align digital asset brokers with their counterparts in more traditional sectors such as equities and bonds.

The rationale is straightforward: as with stocks and bonds, taxpayers are liable for taxes on gains from digital assets and can deduct losses. However, calculating these gains and losses has proven challenging, prompting the need for more detailed reporting by brokers.

Ji Kim, the Chief Legal and Policy Officer at the Crypto Council for Innovation, expressed concerns on social media platform X, criticizing the inclusion of unhosted wallet providers as brokers. Kim argues that this classification overlooks the fundamental nature of wallet providers as mere technology facilitators, who lack insight into the specifics of the transactions or the identities of the involved parties.

Under the proposed regulations, digital asset brokers would be required to issue Form 1099-DA to investors annually, encapsulating both centralized and decentralized exchanges, as well as wallets enabling user trades and bitcoin ATMs.

The legal firm Gordon Law Group anticipates resistance, particularly concerning decentralized exchanges (DEXes). DEXes traditionally do not gather tax-related information from their users, yet the IRS might contend that they are adequately positioned to ascertain user identities and enforce Know Your Customer (KYC) protocols.

Despite potential pushback from the crypto community, the IRS’s stance appears firm. This movement towards stricter compliance echoes broader regulatory trends aimed at increasing transparency and reducing anonymity in digital asset transactions.

The IRS’s initiative to refine tax reporting requirements for cryptocurrency transactions is a significant step toward integrating digital assets into the formal financial system. As the landscape of digital finance continues to evolve, these regulations will play a pivotal role in shaping the interaction between taxation authorities and the burgeoning crypto economy.