The U.S. Treasury’s recent IRS rule has sent shockwaves through the crypto industry, as it now requires all crypto platforms to track and report all transactions. This new regulation, set to be published in the Federal Register on Dec. 30, expands the IRS’s reach to include brokers facilitating digital asset transactions, including decentralized finance (defi) platforms.
According to Bill Hughes, Senior Counsel at Consensys, the new rule will require trading front ends to track and report user activity, both for U.S. and non-U.S. persons, starting in 2027. This rule applies to the sale of every digital asset, including NFTs and stablecoins, with no clear benefit from a revenue perspective. Hughes predicts that legal challenges will arise, questioning the authority of the Treasury and potentially leading to Congressional review.
The expanded definition of brokers now includes trading front-end services, custodial wallet providers, and decentralized exchanges involved in digital asset sales. Even decentralized finance front-end services are classified as brokers if they enable transactions, without direct custody of assets. Platforms using smart contracts to connect users with digital asset protocols must verify identities and report gross proceeds, similar to centralized exchanges. Brokers must issue Form 1099-DA for digital asset transactions and retain records for seven years.
The Treasury argues that these measures are necessary to align tax reporting in the digital asset space with traditional securities brokers, closing the tax gap and increasing transparency. Critics, however, like lawyer Jake Chervinsky, claim the regulation overreaches and must be struck down by the courts or the incoming administration.
Caitlin Long, founder of Custodia Bank, criticizes the Biden administration’s broker rule as overly broad and part of an effort to undermine the U.S. crypto industry. With President-elect Donald Trump set to take office on Jan. 20, 2025, there is hope for a shift in pro-cryptocurrency policies. Trump’s administration plans to establish the U.S. as the “crypto capital of the planet,” with initiatives like creating a national bitcoin reserve and ensuring banking access for crypto firms, signaling a departure from the Biden era’s anti-crypto stance.
As the crypto industry braces for legal battles and regulatory challenges, the future of digital assets in the U.S. remains uncertain. Stay tuned for more updates on how this new IRS rule will impact the crypto landscape.