DeFi
Treasury and IRS finalize broker rule, postpone DeFi decision
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued new tax guidance for cryptocurrency brokerswhich implements transaction reporting starting in 2025. This new regime, however, has postponed decisions on DeFi activities and unhosted wallet providers, as the IRS is still reviewing 44,000 comments from the public.
New IRS reporting requirements for brokers
New IRS rules require cryptocurrency brokers such as trading platforms, hosted wallet services and digital asset kiosks to disclose details of customer asset movements and gains.
These rules, which will take effect on January 1, 2025, aim to integrate crypto brokers with conventional investment firms for filing 1099 forms and cost master data starting in 2026.
Additionally, the IRS clarified that the new requirements will also include transactions in stablecoins and all high-value non-fungible tokens (NFTs), but ordinary sales of stable coins less than $10,000 and NFT earnings less than $600 per year do not need to be reported. This regulation aims to improve compliance and reduce tax evasion in the high-risk area of digital assets.
Deferred Decisions on DeFi and Unhosted Wallets
While the new rule provides clear guidelines for large centralized exchanges like Coinbase and Kraken, it leaves decisions regarding DeFi activities and unhosted wallet providers to a later date.
The IRS added that non-depository industry participants would not be excluded from treatment as broker-dealers, but further analysis is needed. Final rules for these entities are expected to be published later this year.
IRS highlighted audit difficulties without custody companies, noting that these companies may not have the necessary customer data and transparency frameworks. The move provides some respite to the DeFi sector and unhosted wallet providers as more time is saved in formulating better rules.
IRS Requirements for Stablecoins and NFTs
The IRS explained that most ordinary stablecoin transactions will not need to be reported, with the exception of certain large transactions and those generating more than $10,000 in annual income.
Stablecoin transactions will be recorded in bulk rather than by specific transactions to provide relief to common cryptocurrency users while helping the IRS track whale activity.
For non-fungible tokens (NFT) only taxpayers who earned $600 or more per year from NFT sales need to file and report their total income. The IRS will require taxpayer identification information, the number of NFTs sold, and the amount of profit made in these reports. The agency will monitor NFT reports to ensure they adequately contribute to tax enforcement.
Industry Concerns and Compliance Burden
The introduction of these tax regulations has been controversial and sparked strong opposition from the cryptocurrency industry. Concerns have been raised about possible overreach by the US government and burdensome requirements placed on entities that do not traditionally operate as brokers, such as miners and software developers.
THE Blockchain Association and the Digital Chamber had highlighted the excessive extent of the information requested and the importance of the compliance burden. They argue that the proposed rule could require the submission of billions of forms, imposing significant costs and time constraints on broker-dealers. The IRS has estimated that the new rule will affect about 15 million people and 5,000 businesses.
In response, the IRS said it wanted to balance the need for comprehensive reporting with the industry’s ability to comply. The agency also noted that any future changes in legislation regarding stablecoins could result in adjustments to the tax rules.
Read also: Digital Chamber Reports Privacy Concerns in IRS’s Proposed Digital Asset Tax