Author: TaxDAO

1. Introduction

In December 2024, the U.S. Internal Revenue Service (IRS) released the final version of the new tax reporting regulations for crypto asset brokers, marking the beginning of U.S. crypto assets The tax system has entered a new stage.

With Donald Trump winning the election and taking a crypto-friendly stance, it is widely believed that the United States will have a favorable year for crypto assets this year. Despite the optimism, the IRS’s recent “Gross Income Reporting Requirements for Brokers that Regularly Provide Digital Asset Sales Services” has directly exacerbated tensions between U.S. regulators and crypto-asset stakeholders. a16z Crypto even supported the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council in filing a lawsuit, accusing the IRS of overstepping its authority and being suspected of being illegal or even unconstitutional.

According to the IRS, the new rules are intended to broaden the tax base, address tax evasion, and combat money laundering and terrorist financing. However, concerns about the new rules are multifaceted, including concerns about data privacy breaches, increased centralization, and increased tax burdens. Additionally, the industry is concerned that these regulations could stifle U.S. innovation and lead to a brain drain, as increased regulation forces crypto businesses and practitioners to choose friendlier jurisdictions. For ordinary investors/users, the introduction of new regulations means that tax declarations are more complicated. TaxDAO will explain the main contents of this new regulation, analyze its potential impact, and propose countermeasures from different angles.

2. Overview of the main contents of the new regulations

On December 30, 2024, the IRS under the U.S. Department of the Treasury issued final regulations on crypto asset sales and trading broker reports. The regulation, titled "Gross Income Reporting Requirements for Brokers that Periodically Provide Digital Asset Sales Services," provides tax information reporting guidance for brokers that provide crypto asset sales and exchanges and requires crypto businesses that fall under the broker category to submit tax information. Declaration form and related instructions. The most concerning aspect of this new regulation is that it characterizes DeFi front-end platforms as crypto asset brokers and requires them to report users’ tax information in detail.

2.1 Scope of Brokers

The new regulations clearly define which entities should be classified as "brokers". In the field of crypto asset trading, the following types of entities are considered brokers:

(1) Centralized exchanges: platforms such as Coinbase, which provide purchase, sale and trading services for crypto assets.

(2) Decentralized exchanges: such as Uniswap, etc., although they are decentralized, they are still regarded as playing a broker role in crypto asset transactions.

(3) Wallet with trading function: This is a wallet that allows users to buy, sell and trade crypto assets directly on its platform, such asMetamask.

(4) Crypto-asset ATMs and trading kiosks: This includes Bitcoin ATMs and other forms of crypto-asset trading terminals.

At the same time, the following entities are not considered brokers:

(1) Blockchain maintainers: including miners, node operators, etc., they only participate in the maintenance of the blockchain It is not directly involved in the transaction and therefore does not belong to the broker.

(2) Non-trading hardware wallets: Those wallets that need to be connected to other exchanges to complete transactions, their service providers are not considered brokers.

(3) Developers who indirectly promote transactions: software developers who develop software for exchanges and other platforms but do not directly participate in transactions.

(4) Inactive smart contract developers: developers who receive income from smart contracts but are not responsible for their subsequent maintenance and updates.

2.2 Why is the DeFi front-end also within the scope of supervision?

According to IRS regulations, "trading front-end service" refers to the following services:

(1) Receiving users' trading orders;

(2 ) Enable users to enter transaction details through a user interface (such as a graphical interface or voice interface);

(3) Transmit these transaction details to the distributed ledger network so that transactions can be executed on the blockchain .

Even if the DeFi front-end itself does not directly hold the user’s funds or private keys, it is still involved in the initiation and execution of transactions. Therefore, the IRS believes that DeFi front-ends play a role similar to traditional brokers in transactions and should bear corresponding reporting obligations. Furthermore, the IRS made it clear that even if an intermediate step is added to the transaction process (such as through a DeFi aggregator), it does not change the fact that the DeFi front-end is considered a broker.

2.3 What obligations do crypto asset brokers have?

According to the "Total Income Reporting Requirements for Brokers who Regularly Provide Digital Asset Sales Services", crypto asset brokers need to bear the following reporting obligations and other related obligations:

(1) Submit information reports

Form 1099-DA: Starting January 1, 2025, all brokers that hold crypto assets sold by users must use the new 1099-DA form to fully report the core details of each transaction to the IRS. The basic disclosures required by this form include:

A. Total income from crypto-asset trading.

B. Information of both parties to the transaction (such as identity, address).

C. For each transaction, the transfer price and cost basis of the asset need to be recorded.

(2) KYC

In order to meet strict reporting standards, brokers must fully implement KYC to ensure that users’ identity information can be obtained and verified. If the user is a US taxpayer, the broker must comply with relevant tax reporting requirements.

(3) Monitor and record transactions

Brokers need to establish systems to monitor and record all trading activities involving crypto assets to ensure that the required reports can be generated in a timely and accurate manner. This includes collecting, collating and storing transaction data so it can be provided to the IRS when needed.

(4) Anti-money laundering and counter-terrorism financing

Brokers are obliged to monitor and report suspicious transactions to help combat money laundering and terrorist financing activities. As an important participant in the financial market, the transaction data and user information held by brokers are an important data basis for anti-money laundering monitoring.

3. Impact on the crypto industry 3.1 Individual investors

The new regulations seek to ensure that individual investors comply with crypto asset tax regulations. The new rules will make it easier for investors to rely on brokers to obtain relevant information, making it easier to report earnings and pay taxes. However, along with this comes an increased risk of scrutiny and auditing that may be greater than one might imagine.

Another consequence of the new rules is that tracking the cost basis of cryptoassets across multiple wallets and exchanges will become more complex. It is not uncommon for crypto asset users to hold assets on numerous exchanges or execute trades on different platforms, and tracking the cost basis of all these mediums requires the services of a tax professional and the help of professional tax filing software.

3.2 Decentralized Platforms

Decentralized platforms operating in the United States and providing services to American users will face the greatest challenges in adapting. Clearly, stricter tax filing requirements will force these platforms to introduce new KYC into their service offerings. No matter how you look at it, this introduction threatens the fundamental foundation or decentralized nature of what the crypto-asset space represents.

According to the new regulations, even decentralized platforms are now required to disclose users’ personal transaction data, identity certificates and other information. The anonymity characteristics of these platforms have undoubtedly been weakened. Although from a regulatory perspective, the disclosure is intended to combat money laundering and the financing of terrorism, from a user perspective, it may cause resentment among users and lead to a loss of U.S. users from these platforms to other platforms that are not subject to these rules. platform.

Another impact of the regulations is to heighten concerns about centralization. Under the new regulations, decentralized platforms are on the same starting line as centralized platforms and will have the opportunity to control the operation of decentralized platforms and the trading behaviors of their users. Fundamentally speaking, users will be completely exposed to regulators, and decentralized platforms will also be greatly constrained, which violates the original intention of decentralizing the encryption industry.

3.3 Developers and Innovators in the Crypto Industry

Compared with the previous impact, since the rules were announced, the crypto industry’s main concerns have focused on whether the new regulations will stifle innovation in the U.S. crypto asset field. The new regulations may cause small or start-up projects to withdraw from the market because they cannot afford compliance costs, thereby intensifying market competition and industry reshuffle. Leading projects may occupy a larger market share, but they will also face stricter regulatory pressure.. Under the current circumstances, the new regulations will force developers and innovators within the crypto industry to move to more suitable locations and regions.

3.4 Cross-border trading

The introduction of new regulations may prevent non-US exchanges and trading platforms from providing services to US users. Therefore, U.S. users may face limited trading options and more challenges when performing cross-border crypto-asset transactions. This in itself is also a restriction on the borderless nature of decentralized crypto-assets and is not conducive to equal participation in DeFi and other fields. . Additionally, these entities face the challenge of limited services and integrated partnerships to improve user service and experience.

4. Countermeasures for crypto companies and individuals 4.1 Cooperate with tax professionals

Obtaining professional support is crucial for companies to effectively implement the reporting standards stipulated in tax regulations. With the assistance of tax professionals, businesses can ensure they are fully compliant with applicable regulatory requirements.

The regulatory environment surrounding crypto assets is constantly changing, and it is necessary for individual investors and crypto businesses to consult crypto asset tax experts. Working with such professionals ensures compliance with regulatory frameworks, thereby minimizing regulatory or tax evasion risks. In addition, these experts can help mitigate penalties, reduce the risk of tax violations, and identify opportunities in the tax code that may benefit you.

4.2 Use tax filing software to organize crypto-asset financial records

Crypto-asset investors can reduce reporting burdens by keeping detailed logs of transactions, transfers, and more. However, considering that crypto asset transactions often involve multiple wallets, exchanges, and blockchains, and the number of transactions is large, individual investors and businesses can use professional crypto asset financial management and tax filing software such as FinTax to easily track the cost basis. and calculate gains/losses.

4.3 Choose a Compliance Platform

The strict tax reporting system means that IRS enforcement will be stricter. Therefore, it is recommended that crypto asset investors and crypto businesses in the United States limit their activities to platforms that comply with the new reporting requirements to avoid the tax risks posed by the non-compliant platforms themselves.

4.4 Developing an Appropriate Tax Strategy

Cryptoasset investors can implement various tax strategies to minimize the tax payable and ensure compliance with the regulatory framework. These methods include tax loss harvesting, donating appreciated crypto assets, and managing staking income, among others. However, investors should consult a tax professional before implementing these strategies.

5. Conclusion

Since the implementation of the broker rules is still some time away, the crypto community may not feel the impact of the rules immediately. However, the introduction of new regulations will affect the crypto-asset industry in the United States and around the world, and increase tensions between the crypto industry and U.S. regulators. It is worth thinking about that even if the United States hopes to effectively implement the tax system for crypto assets and reduce tax evasion in this field, it should also pay attention to the proportional relationship between ends and means. If the cost of implementing the tax system is to have a heavy blow to DeFi and even the entire crypto asset industry, then this behavior is tantamount to squandering the entire lake.

TaxDAO believes that in the future, the United States may provide a more relaxed tax environment and more tax incentives for the crypto-asset industry, but this does not mean that the IRS will relax the collection of taxes on crypto-assets. On the contrary, a low tax burden and a healthy tax system are often closely linked to a strict enforcement system.