Author ： TaxDAO
Overview of the Evolution of U.S. Crypto Asset Tax Regulation and Reporting Requirements
Looking back at the history of U.S. tax regulation of crypto assets, its evolution path is relatively clear. In 2014, the IRS issued Notice 2014-21, officially defining cryptocurrency as property rather than currency, and established a corresponding tax treatment framework. In 2021, the signing of the (Infrastructure Investment and Jobs Act) (IIJA) required that all transactions involving crypto assets must be reported, and introduced Form 8300, which expanded crypto asset transactions to the reporting scope of Form 1099, and brought tax regulation of crypto asset transactions to a new level. With the recent finalization of the IRS draft on broker reporting of digital asset sales and transactions, U.S. tax regulation of crypto assets has entered an unprecedentedly strict stage.
(Gross Income Reporting Requirements for Brokers Who Regularly Provide Digital Asset Sales Services) (hereinafter referred to as the “(Reporting Requirements)”) is an important document prepared by the U.S. Internal Revenue Service (IRS) to regulate tax reporting on digital asset transactions. The (Reporting Requirements) elaborate on a series of tax reporting regulations that brokers must follow when providing digital asset sales and trading services to clients. It clarifies the definition of brokers and includes traditional digital asset trading platforms, payment processors, custodial wallet providers, and decentralized financial (DeFi) service providers that automatically execute transactions through software or smart contracts. This means that even if a DeFi platform does not directly hold customer private keys or digital assets, as long as it provides core services such as trading interfaces, order processing and execution, it must comply with the corresponding tax reporting regulations. In addition, the (Reporting Requirements) also specify specific matters such as the content and format of the report, the time and frequency of the report, etc., providing brokers with clear operational guidance, and also providing a basis for the IRS to monitor digital asset trading activities and supervise tax compliance.
Form 1099-DA is a tool for the IRS to deal with the increasingly frequent transactions of crypto assets and the difficulty of tax supervision. Its comprehensiveness and detailedness are remarkable. This form not only requires brokers to disclose in detail the date and type of transactions (such as buying, selling, exchanging, etc.), but also accurately report the transaction amount, covering the total income and possible gains, losses and cost basis information. It is particularly critical that brokers provide comprehensive information about investors, including name, address, social security number, and extend to the specific type, quantity and fair market value of digital assets.
Good medicine tastes bitter?
The introduction of new regulations has imposed stricter tax reporting requirements on crypto asset brokers. In order to meet strict reporting standards, brokers must fully implement KYC (Know Your Customer) policies, which will lead to a significant increase in their operating costs and make compliance more difficult. The entire industry is therefore facing new challenges.
From an anti-money laundering perspective, the lack of transparency of crypto assets may constitute a loophole in the financial defense line. Money laundering activities will disrupt the normal order of the financial market and provide financial cover for various criminal activities. As important participants in the financial market, the transaction data and customer information held by brokers are an important data basis for anti-money laundering monitoring. Strict reporting requirements can help to promptly detect and block money laundering routes, thereby curbing the breeding and spread of financial crimes.
The low transparency of crypto assets may also cause problems in anti-terrorist financing. Terrorist financing is the economic basis for the continuation and expansion of terrorist activities. As participants in financial activities, brokers have the obligation and ability to monitor and report suspicious transactions and provide key intelligence to anti-terrorism departments to cut off terrorist funding sources and maintain national security and social stability.
In terms of anti-tax evasion, reporting requirements for crypto asset brokers are also particularly important. Tax evasion will weaken the country's fiscal foundation and undermine tax fairness and market order. As part of the tax collection and management system, the reporting obligations followed by brokers help tax authorities accurately identify tax evasion, strengthen tax management, and maintain the fairness and authority of the tax system. Therefore, improving the transparency of crypto assets through reporting requirements for brokers is an important measure to deal with these potential problems.
Compliance pains or deadly poison?
(Reporting requirements) have had a significant impact on the DeFi field. DeFi, with its decentralization and anonymity, provides flexible and efficient financial services outside the traditional financial system. However, the strengthening of supervision may seriously challenge these characteristics. On the one hand, Form 1099-DA requires brokers to disclose investors’ wallet addresses and transaction quantities. The implementation of the resulting KYC policy will weaken the anonymity of DeFi, force investors to change their trading habits, provide true identity information, and reduce transaction costs. Privacy. On the other hand, in order to meet reporting requirements, DeFi platforms need to invest more resources and energy to collect, organize and report user transaction data. This will undoubtedly increase operating costs, indirectly affect the autonomous operation of smart contracts, and increase the need for human intervention. Adversely affects the autonomous operation and decentralized governance of smart contracts. More importantly, (reporting requirements) may have a profound impact on the DeFi ecosystem. It challenges DeFi's core mission of popularizing the ease of use of currency and payment methods and promoting the globalization and decentralization of financial services. If DeFi becomes transparent and de-anonymous, its market appeal and development potential will be greatly reduced.
(Reporting requirements) It not only affects DeFi, but also stirs up the entire crypto industry. The new regulations put crypto asset brokers under the dual pressure of compliance and operating costs, forcing them to devote more resources to meet regulations. This may cause small or start-up brokers to withdraw due to unbearable conditions, intensifying market competition and industry reshuffle. At the same time, the new regulations have triggered controversy over privacy, data security and constitutional rights; the new regulations also pose a potential threat to the innovation and development of the crypto industry. The crypto industry urgently needs a loose and flexible regulatory environment to stimulate innovation. However, the compliance pressure and increased costs brought about by the new regulations may suppress the industry's innovative momentum.
To some extent, the crypto broker rule is like a bitter medicine, aimed at improving tax transparency, cracking down on illegal activities, and ensuring tax fairness and market order. However, its urgency of operation also makes people worry whether it will become a deadly poison that puts the crypto industry in a desperate situation. It is undeniable that the implementation of this rule is indeed a bit hasty. Against the background of the rapid development of the crypto industry, how to find a balance between encouraging innovation and strengthening supervision is an urgent problem to be solved. In addition, considering the Trump administration’s pro-crypto asset attitude, perhaps Trump will veto the regulation before the effective date (reporting requirement), leaving the crypto industry with a more relaxed development space.
Of course, we must face the fact that if this rule comes into effect, it will inevitably bring a certain impact on the decentralized finance (DeFi) industry. As an emerging force in the field of encryption, decentralized finance is centered on decentralization and autonomous operation, and the strengthening of tax reporting requirements will undoubtedly increase the operating costs and compliance difficulties of DeFi platforms, and may even force them to change their original business models. However, this may be the pain that the encryption industry must go through in its growth process. Historically, the encryption industry has always shouldered the mission of decentralization, and the centralized supervision of the government has always been an unavoidable pressure in its development. Although every strengthening of supervision may cause the industry to experience some twists and turns, the resilience and innovation capabilities shown by the encryption industry can always allow it to rise from the ashes. Although the future development path is full of uncertainty, the encryption industry still has broad prospects and unlimited possibilities.
