IRS seeks tax compliance with new cryptocurrency rules

The U.S. Treasury has unveiled new regulations requiring cryptocurrency brokers to report their users’ transactions to the Internal Revenue Service (IRS).

Starting in 2026, these brokers must report gross revenues from sales of digital assets starting in 2025. They must also report tax information on certain digital assets in 2027 for the prior year.

IRS Releases Final Draft Cryptocurrency Rules

The new regulations target operators of depository digital asset trading platforms, hosted wallet providers, digital asset kiosks and certain digital asset payment processors (PDAPs). The IRS said these brokers handle the majority of digital asset transactions and cover a large number of taxpayers.

Brokers must disclose the movements and profits of client assets, including high-value stablecoins such as USDT and NFTs. They must also report the fair market value of real-world tokenized assets in real estate transactions. This regulation provides cryptocurrency investors with a simple Form 1099, similar to that used by banks and brokers.

Read more: How to Reduce Cryptocurrency Tax Liability: A Comprehensive Guide

The move is a significant step forward in cryptocurrency taxation, aimed at curbing tax avoidance. IRS Commissioner Danny Werfel emphasized that these provisions are key to improving tax compliance among high-income earners. He added that these provisions will equip taxpayers with the necessary information to simplify the tax reporting process.

“We need to ensure that digital assets are not used to hide taxable income and that the final regulations will improve the detection of non-compliance in the high-risk area of ​​digital assets. Our research and experience show that third-party reporting improves compliance. Additionally, these regulations will provide taxpayers with much-needed information, which will reduce the burden and simplify the process of reporting digital asset activity,” Werfel said.

Meanwhile, decentralized exchanges and self-service wallets are not subject to the new reporting rules. Instead, the IRS said it was still reviewing industry comments and needed more time to investigate decentralized networks.

“The final regulations do not include reporting requirements for brokers who do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized brokers or non-custodial brokers. The U.S. Treasury and the IRS intend to set rules for these brokers in another set of final regulations,” the IRS explained.

Read more: The Ultimate Guide to US Crypto Taxes for 2024

Industry organizations such as The Blockchain Association welcomed the IRS’s decision to further investigate DeFi. The group’s head of legal, Marisa Tashman Coppell, said the regulator’s move showed the industry’s collective voice continued to positively impact Washington.

Similarly, Jake Chervinsky, a prominent cryptocurrency lawyer, described the move as an “unexpected but massive political victory for DeFi.”

“A proposed rule implementing the tax provisions of the Infrastructure Act would require non-custodial DeFi interfaces for KYC users. The Treasury Department just finalized that rule, but only for custodians, leaving DeFi for another day,” he noted.