The IRS released the latest version of its controversial “broker rule” guidance late Friday.
Tax agency discloses for the first time Newly Proposed Regulations As discussions about tax reporting requirements for cryptocurrency brokers begin in August 2023, concerns have been raised that vague language could have a detrimental effect on many parts of the cryptocurrency industry, from wallet providers to decentralized exchanges.
“Good news: They agree that custodial brokers are brokers.” Coin Center Chief Communications Officer Neeraj Agrawal said in a post on “Our concern is whether self-custodial applications (like DEXs) that are just code without a central authority can also be considered brokers.”
That means exchanges like Kraken and Coinbase will be subject to new rules that will partially take effect in 2025. However, they are subject to rules that impose privacy breach reporting and KYC requirements that are potentially impossible for decentralized non-custodial protocols. We’ll wait and see.
“Treasury and the IRS would benefit from additional consideration of issues related to non-custodial industry participants,” the application states.
Coin Center was one of several companies that opposed the IRS’s initial expanded definition of brokers that appeared to be tied to non-custodial, self-executing cryptocurrency platforms. only last weekThe Blockchain Association also complained that compliance costs could be prohibitive.
Building on efforts to expand IRS regulation of cryptocurrency transaction tax reporting in the Infrastructure Investment and Jobs Act beginning in 2021, the proposed regulations not only expanded the number of entities treated as brokers, but also significantly expanded the types of entities with reporting obligations. I will do it. In accordance with 1099 tax reporting requirements (and cryptocurrency-specific 1099-DA forms).
The Blockchain Association estimates in an open letter that the law would result in 8 billion 1099-DA tax forms, adding $254 billion in processing and compliance costs. This is in part because nearly all transactions involving blockchain-based assets, from NFTs to stablecoins, fall within the scope of 1099 reporting, Bitwave CEO Patrick White wrote in a recent editorial: Rebellious.
Agrawal notes that the IRS appears to have recognized this backlash and postponed a final decision on cryptocurrencies. This is a point echoed by Bill Hughes, senior counsel and director of global regulatory affairs at Consensys, who said the guidance “does not establish rules related to non-hosted wallets and related non-custodial software products.”
“They said they were still reviewing the product as a possible broker and would confirm the status later,” he added.
Disclaimer: The Block is an independent media outlet delivering news, research and data. As of November 2023, Foresight Ventures is a majority investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, impactful and timely information about the cryptocurrency industry. Below are our current financial disclosures.
© 2023 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be used as legal, tax, investment, financial or other advice.