IRS Form Sparks Fear in the Crypto Industry

A recent draft version of IRS Form 1099-DA has stirred significant anxiety across the cryptocurrency landscape. This form, scheduled for mandatory use by 2025, has introduced a potential requirement for American decentralized finance (DeFi) users to report their self-custodial wallet addresses to the federal government.

The essence of this development is the inclusion of a section that might classify individuals with unhosted wallets as brokers, a move that could dramatically alter the fabric of privacy within the crypto community.

The document specifies that any crypto transaction considered to have originated from a broker must be reported. While it is almost certain that crypto exchanges will be categorized as brokers, there is a growing concern that even individual DeFi traders could fall under this classification. This has been a contentious point, especially since crypto lobbying groups had previously voiced their apprehensions about such a broad definition by the IRS.

One particular aspect of the form that has caused uproar is the requirement to clarify the type of broker involved in the transaction. Notably, there is an option labelled “Unhosted Wallet Provider,” referring to self-custodial crypto addresses independent of any third-party services. Legal experts and stakeholders within the crypto sphere interpret this as a clear signal that the IRS intends to treat even decentralized protocols, which were inherently designed to safeguard user privacy, as conventional brokerage firms.

The ramifications of such classifications could be profound. Users of platforms like Uniswap might soon find themselves obligated to disclose as much personal information as customers of traditional brokerage firms like Charles Schwab or Robinhood. This prospect has understandably unsettled many, stirring fears that the foundational principle of pseudonymity in crypto transactions is under threat.

The pushback from the community has been robust. Coin Center, a prominent crypto lobbying group, has criticized the IRS’s approach as potentially unconstitutional, arguing that open-source wallet software providers do not facilitate transactions in the manner of traditional brokers. Despite these objections, the IRS’s course remains uncertain, with no clear indications of a pivot before the form’s implementation.

During a months-long public comment period initiated last fall, crypto advocacy groups vigorously lobbied for a redefinition of “broker” in hopes of preserving the autonomy and anonymity of DeFi platforms. Their concerns, however, seem to have been largely ignored if the draft form is anything to go by.

As the industry braces for potential legal battles, figures like Shehan Chandrasekera and Jake Chervinsky offer contrasting views on the future. Chandrasekera expresses pessimism about the preservation of privacy in U.S. crypto operations, while Chervinsky finds a silver lining, suggesting that nonsensical rules rarely withstand judicial scrutiny and hinting at the community’s readiness to challenge the IRS’s definitions legally.

While the IRS form aims to regulate and gain insight into crypto transactions, it also challenges the very principles of privacy and decentralization that form the bedrock of the DeFi sector. The community’s response, both legally and in public discourse, will be crucial in shaping the landscape of cryptocurrency regulation in the United States.