Cryptocurrency brokers, including exchanges and payment processors, must report new information to the Internal Revenue Service (IRS) about users selling and trading digital assets, under proposed rules published by the U.S. Treasury Department on Friday.
The rule is part of a broader push by Congress and regulators to crack down on cryptocurrency users who may fail to pay their taxes.
The proposed new tax reporting form, known as Form 1099-DA, is designed to help taxpayers determine whether they owe taxes and help cryptocurrency users avoid complex calculations to determine their earnings, the U.S. Treasury Department said.
Digital asset brokers will also be subject to the same information reporting rules as brokers of other financial instruments such as bonds and stocks, the Treasury said.
According to the proposal, the definition of “broker” would include centralized and decentralized digital asset trading platforms, encrypted payment processors, and certain online wallets where users store digital assets. The rules would cover cryptocurrencies such as bitcoin and ether, as well as non-fungible tokens.
Brokers are required to send forms to the IRS and digital asset holders to assist them with tax preparation.
The new requirements stem from the $1 trillion (nearly Rs 8,260,700 crore) Infrastructure Investment and Jobs Act of 2021, which includes a provision aimed at increasing tax reporting requirements for digital asset brokers. It instructs the IRS to define which companies qualify as cryptocurrency brokers and provides reporting forms and instructions.
It also extended reporting requirements for certain cash transactions over $10,000 (nearly Rs 8,26,360) to digital assets.
When the bill was passed, it was estimated that the new rules could bring in nearly $28 billion (nearly Rs 23,138 crore) over a decade.
The Treasury Department proposes that the rules will come into effect for brokers in 2025 for the 2026 tax filing season.
“This is part of Treasury’s broader efforts to close tax gaps, address tax evasion risks posed by digital assets, and help ensure everyone plays by the same set of rules,” the Treasury Department said in a statement.
The crypto industry has 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 cryptocurrency users with the information they need to accurately comply with tax laws.”
Miller Whitehouse-Levine, chief executive of the DeFi Education Fund, a lobby group focused on decentralized finance, said the proposed approach would neither make filing taxes easier nor improve tax compliance.
“Today’s IRS proposal is confusing, contradictory, and misleading,” he said in a statement. “It seeks to apply a regulatory framework based on the existence of intermediaries where they do not exist.”
The IRS currently requires cryptocurrency users to report many digital asset activities on their tax returns, including cryptocurrency transactions, regardless of whether the transactions result in gains. Users need to do their own calculations, and digital asset trading platforms do not provide that information to the IRS.
Several Democratic senators, including Elizabeth Warren, urged the Treasury Department to quickly implement the rules in a letter sent earlier this month, arguing that otherwise tax evaders and cryptocurrency intermediaries “will continue to game the system.”
The Treasury Department and the Internal Revenue Service are accepting feedback on the proposal through Oct. 30. They will also hold public hearings on the proposal on Nov. 7-8.
© Thomson Reuters 2023
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