The U.S. Treasury Department’s Proposed Crypto Tax Reporting Rules

The U.S. Treasury Department has unveiled proposed regulations as part of a broader effort to enhance tax compliance in the cryptocurrency sector. Under these rules, cryptocurrency brokers would be obligated to report to the Internal Revenue Service (IRS) new information on users’ sales and exchanges of digital assets. This initiative aims to crack down on crypto users who may be evading taxes, and aligns with the provisions of the $1 trillion 2021 Infrastructure Investment and Jobs Act. The proposed regulations would introduce a new tax reporting form called Form 1099-DA, simplifying the tax calculation process for crypto users and fostering compliance while also helping taxpayers determine their tax liabilities accurately.

Under the proposal, the definition of a “broker” would encompass both centralized and certain decentralized digital asset trading platforms, crypto payment processors, real estate persons involved with cryptocurrency transactions and selected online wallets. This expansion in the definition seeks to create parity between digital asset brokers and brokers of traditional financial instruments like bonds and stocks. Additionally, the rules would cover a range of digital assets, including cryptocurrencies like bitcoin and ether, as well as non-fungible tokens (NFTs).

Cryptocurrency brokers would be required to send the newly introduced tax forms to both the IRS and digital asset holders to aid in tax preparation. Moreover, the proposal extends reporting requirements to cover certain cash transactions exceeding $10,000 in digital assets.

While the IRS currently mandates crypto users to report their digital asset activities on tax returns, the proposed regulations aim to streamline and enhance this process. The rules would be effective for brokers starting in 2025 for the 2026 tax filing season. The Treasury Department and the IRS have invited feedback on these proposed regulations until October 30, 2023, and will conduct public hearings on November 7-8, 2023 to further deliberate on the matter.

The implementation of these regulations is part of a broader effort to address tax evasion risks associated with digital assets and ensure a level playing field for all participants in the cryptocurrency market. Currently, with no reporting requirements in place, onerous time is added for the taxpayer and tax advisor to create the reports needed for tax returns. To learn more about the crypto tax reporting rules and how they may affect you, please contact Edward Kim, Tax Partner in the Private Client group, or your Anchin Relationship Partner.