US Treasury Finalizes Cryptocurrency Tax Rules with Form 1099-DA

TDR’s top three takeaways from the U.S. Treasury’s finalization of cryptocurrency tax rules with the new Form 1099-DA:

• The US Treasury’s new cryptocurrency regulations aim to combat tax avoidance.
• The U.S. Treasury requires cryptocurrency brokers to use Form 1099-DA.
• The new regulations do not cover DeFi platforms because they are decentralized.

The U.S. Treasury has finalized new cryptocurrency tax reporting rules, requiring cryptocurrency brokers to use a newly created Form 1099-DA to report digital asset transactions to the IRS. The rule aims to close a tax loophole by ensuring that cryptocurrency transactions are reported similarly to traditional financial transactions.

The U.S. Treasury Department has announced finalized regulations that require cryptocurrency brokers, including exchanges and payment processors, to report detailed information about digital asset transactions to the IRS using a newly created form, the 1099-DA. The development aims to close a tax loophole by ensuring that cryptocurrency transactions are reported in a manner similar to traditional financial transactions.

The new rules primarily target centralized exchanges, hosted wallet providers, and payment processors, while exempting decentralized finance (DeFi) platforms and digital asset miners. This exemption reflects Treasury’s recognition of the complexity and decentralized nature of these entities. As a result, the implementation of reporting requirements for DeFi platforms and non-custodial entities has been delayed.

The newly introduced cryptocurrency tax rules will go into effect in 2025, giving entities time to adapt their systems and processes to the requirements. The cryptocurrency industry has raised significant concerns about the privacy impact and potential burden of collecting and reporting extensive data. There are concerns about the feasibility of these requirements for certain platforms, particularly those not currently configured to support the collection of personal data. Many comments submitted during the public comment period highlighted concerns about the reporting burden and privacy risks associated with collecting personal data for small transactions.

“Thanks to the bipartisan Infrastructure Investment and Jobs Act, digital asset investors and the IRS will have better access to the documentation they need to easily file and review their tax returns,” said Acting Assistant Secretary for Tax Policy Aviva Aron-Dine. “By implementing the Act’s reporting requirements, these final cryptocurrency tax regulations will make it easier for taxpayers to pay the taxes they owe under current law while reducing tax avoidance by wealthy investors.”

IRS Commissioner Danny Werfel publicly highlighted the importance of these rules in combating tax avoidance last week. “We reviewed thousands of public comments and believe that the new guidance addresses these issues while striking a balance between industry implementation challenges and closing the tax loophole associated with digital assets. This rule is an important part of a broader effort to improve tax compliance for high-income earners. We need to ensure that digital assets are not being used to hide taxable income, and these final rules will improve compliance detection in the high-risk area of ​​digital assets. Our research and experience show that third-party reporting improves compliance. In addition, these cryptocurrency tax rules will provide taxpayers with much-needed information that will reduce the burden and simplify the process of reporting their digital asset activity.

The Treasury is seeking feedback on the proposed rules, including whether stablecoin transactions should be exempt if they do not generate a profit or loss. The final cryptocurrency tax rules aim to ensure compliance and curb tax avoidance, but industry concerns about privacy and operational activity are likely unmet.

Want to stay up to date on Cannabis, AI, Small Cap and Crypto? Sign up for our Daily Baked in Newsletter!