On August 25, 2023, the United States Treasury Department released a new rule that would require cryptocurrency brokers, including exchanges and payment processors, to report users’ information including their cryptocurrency sale purchases and exchanges of digital assets to the Internal Revenue Service (IRS).
This move aims to simplify the potential tax evasion in the cryptocurrency realm. This new proposed rule introduced a new tax reporting form, that is Form 1099-DA, which helps taxpayers to calculate their tax burden only related to cryptocurrency and Non-fungible tokens.
The rule expands the definition of a “broker” to cover both centralized and decentralized digital asset trading platforms, crypto payment processors, and certain online wallets where users store digital assets. These brokers would need to send the new tax reporting forms to both the IRS and digital asset holders, streamlining the process of tax preparation.
These requirements originate from the 2021 Infrastructure Investment and Jobs Act, which aimed to increase tax reporting standards for digital asset brokers. The legislation also extended reporting requirements for significant cash transactions involving digital assets. The Treasury Department estimates that these rules could generate around $28 billion in tax revenue over a decade.
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The proposed rules are expected to take effect for brokers in 2025, applicable to the 2026 tax filing season. The Treasury Department emphasizes that this effort is part of a broader strategy to close the tax gap, prevent tax evasion related to digital assets, and ensure a level playing field for taxpayers.
The crypto industry’s response to the proposal has been mixed. Some believe that if implemented correctly, the rules could assist crypto users in complying with tax laws accurately. However, others criticize the proposed approach, claiming it wouldn’t simplify tax filing or improve compliance, especially considering the unique nature of decentralized finance (DeFi).
Recently, in a report by Todayq News on August 3, 2023, Democratic Senators were pressuring the IRS and Treasury to quickly publish cryptocurrency tax guidelines mandated by an earlier bill. They’re also alarmed by potential annual losses of up to $50 billion due to crypto tax evasion, endangering the government’s financial stability. Urgent action for stricter regulations is being emphasized.
Now, the IRS requires crypto users to report digital asset activities on their tax returns, even if they didn’t result in gains. Users are responsible for making these calculations, and the platforms where digital assets are traded don’t provide the IRS with this information. The Treasury Department and the IRS are open to feedback on the proposal until October 30. Public hearings on the matter are scheduled for November 7-8