The Internal Revenue Service (IRS) has introduced new regulations requiring decentralized finance (DeFi) brokers to collect and report user transaction data, including the total gains from digital asset transactions. This initiative aims to strengthen tax compliance in the emerging DeFi industry.
According to the updated rules, DeFi brokers must provide clients with a 1099-DA form, which contains key details of the transactions, such as name, wallet address, and transaction amount. This positions DeFi service providers on par with traditional securities brokers regarding tax reporting obligations, representing a significant shift in regulatory oversight.
The regulations clearly state that the broker responsible for recording the total gains to the client's wallet address or account is also responsible for reporting the transaction. This practice aligns with the existing securities broker framework, ensuring that each transaction is reported by only one broker, thereby simplifying the reporting process and reducing potential errors.
Although the final regulations do not require the reporting of transaction timestamps or wallet address information, brokers must still retain this data for seven years for IRS inspection. The new 1099-DA form will be used to report this information, providing taxpayers with the necessary details to accurately include the gains from digital asset transactions in their income.
The IRS's decision to implement these regulations highlights its commitment to improving tax compliance in the rapidly evolving DeFi industry, where traditional financial regulations are being challenged and redefined. Including non-custodial wallets (also known as cold wallets or self-custody wallets) in the definition of brokers has been a contentious issue, as it could expand the scope of what should be classified as brokers.
Key Points of Final Regulations
1099-DA Form: Brokers are required to use this form to report the gains from the disposition of digital assets, including cryptocurrencies, NFTs, and stablecoins.
Broker Classification: Brokers must specify their type, such as self-service terminal operators, digital asset payment processors, custody wallet providers, non-custodial wallet providers, or other digital asset filers.
Transaction Data: Mandatory transaction data includes sales transaction ID (TxID), digital asset address, and sales units. Transfer-related data points include transfer-in TxID number, transfer-in digital asset address, and transfer-in units.
Data Retention: Brokers are required to retain transaction data for seven years for IRS inspection.
Effective Date: The regulations will take effect 60 days after publication in the Federal Register, with reporting of these transactions expected to begin in January 2026.
Using DeFi platforms also requires KYC
The IRS's new regulations present significant challenges for DeFi platforms, which often operate in a highly decentralized and anonymous manner. The requirements for centralized reporting and KYC (Know Your Customer) practices may force certain segments of DeFi to either centralize or relocate overseas to avoid compliance burdens. Nevertheless, through appropriate compliance strategies and a focus on privacy-preserving technologies, DeFi platforms can still navigate this evolving regulatory landscape while adhering to their core principles.
The IRS will align cryptocurrency tax reporting requirements with those of other assets, aiming to simplify and reduce compliance costs for taxpayers while helping to narrow the tax gap. As Deputy Assistant Secretary for Tax Policy Aviva Aron-Dine stated: 'These regulations will ensure that all taxpayers operate under the same rules and have access to the information needed for accurate tax reporting.'
This article is republished with permission from: (Block客)
'Does DeFi also require KYC? New IRS Regulations: DeFi brokers must report user transaction data' was first published in 'Crypto City'