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Cryptocurrency brokers, including exchanges and payment processors, would have to report new information on users’ sales and exchanges of digital assets to the Internal Revenue Service (IRS) under a proposed US Treasury Department rule published on Friday.
The rule is part of a broader push by Congress and regulatory authorities to crack down on crypto users who may be failing to pay their taxes.
A proposed new tax reporting form called Form 1099-DA is meant to help taxpayers determine if they owe taxes, and would help crypto users avoid having to make complicated calculations to determine their gains, the Treasury Department said.
It would also subject digital asset brokers to the same information reporting rules as brokers for other financial instruments, such as bonds and stocks, Treasury said.
Under the proposal, the definition of a “broker” would include both centralized and decentralized digital asset trading platforms, crypto payment processors and certain online wallets where users store digital assets. The rule would cover cryptocurrencies, like bitcoin and ether, as well as non-fungible tokens.
Brokers would need to send the forms to both the IRS and digital asset holders to assist with their tax preparation.
The new requirements stem from the $1 trillion (nearly Rs. 82,60,700 crore) 2021 Infrastructure Investment and Jobs Act, which included a provision that aimed to increase tax reporting requirements for digital asset brokers. It instructed the IRS to define what firms qualified as crypto brokers and provide forms and instructions for reporting.
It also extended reporting requirements for certain cash transactions of more than $10,000 (nearly Rs. 8,26,360) to digital assets.
At the time the bill was passed, it was estimated that the new rules could bring in close to $28 billion (nearly Rs. 2,31,380 crore) over a decade.
The Treasury proposed that the rules would be effective for brokers in 2025 for the 2026 tax filing season.
“This is part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules,” the Treasury said in a statement.
The crypto industry had mixed reactions to the proposal. Blockchain Association CEO Kristin Smith said in a statement that if done correctly, the new rules “could help provide everyday crypto users with the necessary information to accurately comply with tax laws.”
Miller Whitehouse-Levine, CEO of the DeFi Education Fund, a lobbying group focused on decentralized finance, said the proposed approach would neither make filing taxes easier nor improve tax compliance.
“Today’s proposal from the IRS is confusing, self-refuting, and misguided. It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don’t exist,” he said in a statement.
The IRS currently requires crypto users to report on their tax returns many digital asset activities, including trading cryptocurrencies, regardless of whether the transactions resulted in a gain. Users are required to make that calculation themselves, and the platforms on which digital assets trade do not give the IRS that information.
Several Democratic senators, including Elizabeth Warren, urged the Treasury in a letter sent earlier this month to quickly implement the rules, arguing that otherwise tax evaders and crypto intermediaries “will continue to game the system.”
The Treasury Department and the IRS are accepting feedback on the proposal until October 30. They will also hold public hearings on the proposal on November 7-8.
© Thomson Reuters 2023
