U.S. crypto tax proposal: Forging a new path in the digital economy
After years of uncertainty surrounding taxation in the crypto world, the U.S. Treasury Department has unveiled a comprehensive set of proposed rules that promise to reshape how the crypto industry reports on users’ sales and exchanges of digital assets. With clearer regulatory frameworks, crypto businesses can navigate tax reporting and regulatory compliance with confidence.
Make sure to read this guide to the proposed changes. The rules won’t come into effect until 2025 but understanding how they will change your work and the crypto industry is essential.
Defining crypto brokers: A pivotal moment
The crypto industry has faced significant uncertainty in recent times. The industry's growth has outstripped the slow-moving federal bureaucracies that oversee the other parts of the finance industry, like traditional banks and publicly traded companies. Regulators have increased scrutiny of the industry while failing to provide clear regulatory frameworks for crypto enterprises - leaving businesses unsure of how to declare financial activity. Companies like Coinbase are eager to do everything by the books, so let’s give them the proper overall guidelines to act in certainty.
The U.S. Treasury’s proposal begins to clarify some of the regulatory concerns, such as which entities fall into the category of crypto ”broker”. Entities that are considered brokers must report customer transactions to the IRS. Without clear definitions of which entities constitute brokers, crypto businesses cannot be sure of which reporting requirements apply to them.
Within the proposal’s suggested framework, crypto brokers include:
- Digital asset trading platforms
- Digital asset payment processors
- Specific digital asset-hosted wallet providers
- Entities that redeem self-issued digital assets
With clear definitions and regulatory frameworks, businesses and institutions with digital assets can comfortably move forward in what exact financial activity to report to regulators.
The burden of reporting no longer falls solely on the consumer
Centralized cryptocurrency exchanges, payment processors, designated hosted wallet providers, and self-issuers of digital tokens face new reporting obligations under the proposed regulatory changes. They will have to report users’ sales and exchanges of digital assets in a bid to reduce crypto users’ ability to avoid tax payments.
Under IRS rules, crypto users must declare activity relating to digital assets - whether it resulted in a gain or not. Users must calculate gains and losses themselves since crypto trading platforms do not provide this information.
Under the new rules, digital asset brokers must comply with the same reporting requirements as brokers of other financial instruments, such as bonds and stocks. The enhanced reporting for crypto brokers would see them now cover:
- Cost basis
- Fair value
- Gains and losses
- Backup withholdings for certain digital assets
The proposal introduces an entirely new tax form - the 1099-DA- to aid them with these potential reporting requirements. Crypto accountants and bookkeepers have had to fit crypto transactions into traditional tax forms not designed for these new asset classes. As a result, accountants and bookkeepers may complete these reports incorrectly by accident - confusing tax auditors and regulators. With the proposed new report, crypto accountants and bookkeepers would no longer have to use reports that do not encompass the asset class they are disclosing. It will add clarity and help redefine how brokers report transactions.
An evolving dialogue: Seizing opportunities and addressing challenges
The proposed changes are subject to comments from various stakeholders across the crypto industry. Established exchanges alongside nascent DeFi platforms will have the opportunity to respond to the proposal.
Businesses and institutions across the industry have begun to weigh in on the suggestions made by the U.S. Treasury Department. Though some proposed rules in the document have been praised, the proposal has already generated some controversy. In certain areas, the proposed changes could lead to new reporting challenges for certain crypto business models.
The miner's reprieve
Many had been concerned about potentially imposing excessive reporting requirements on mining companies. Increased regulatory costs on complex mining pools would stifle innovation in this US industry. For the purpose of this law, miners fall outside the pure definition of a broker. Recognizing miners' distinct role in validating transactions on blockchain networks, the proposal exempts them from the broker classification.
The DeFi conundrum
While the proposal has begun to address regulatory uncertainty for certain crypto businesses, it has opened up further uncertainties for DeFi platforms. While several DeFi activities outside the broker checklist will be exempt from reporting obligations, certain operations conducted by decentralized exchanges (DEXs) could fall under the broker classification. This ambiguity raises essential questions about how DEXs will navigate the reporting landscape and whether they will be subject to additional regulations yet to be announced.
Paving the way forward
The unveiling of the U.S. crypto tax proposal marks a turning point for the cryptocurrency industry, propelling it toward greater regulatory clarity. It proposes several new rules for crypto businesses that help to:
- Clearly define the roles of brokers
- Address reporting obligations for crypto brokers
- Accommodate the diverse operations of businesses in the digital asset space
As such, the proposal strikes a balance between accountability and innovation. Without regulatory certainty, businesses in the industry will struggle to comply with reporting standards and regulations. However, if the proposed reporting burden is too great, innovation at crypto organizations might suffer. The proposal has found a way to balance both of these points of view.
Despite concerns around certain crypto operations like DeFi, the industry is crying out for a new era of taxation equipped with the tools and frameworks that can encompass the diverse business models operating within it. The proposal begins to define what this new tax framework might look like.