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The US Treasury and the Internal Revenue Services (IRS) have proposed a new set of regulations that would significantly increase reporting requirements for firms that handle digital asset transactions.
In an effort to crack down on “tax cheats”, the Treasury has opened a consultation on new regulations that would be applied to firms that handle sales and exchanges of digital assets.
In a statement, the Treasury said the proposals are part of the agency’s broader effort to “close the tax gap, address tax evasion risks posed by digital assets and ensure that everyone plays by the same set of rules”.
If adopted, the regulations would amend existing rules on tax reporting by brokers, so that brokers of digital assets are subject to the same rules as brokers of securities and other financial instruments.
Under current law, taxpayers owe tax on gains and may be entitled to deduct losses on digital assets when sold.
However, according to the Treasury, taxpayers find it “difficult” and “costly” to calculate their gains, and many ignore the requirement to do so altogether.
Under the proposed rules, brokers would be required to provide customers with a new tax form that is specific to digital assets, known as a Form 1099-DA.
In theory, this would help taxpayers “avoid having to make complicated calculations” or “pay digital asset tax preparation services in order to file their tax returns".
“These regulations align tax reporting on digital assets with tax reporting on other assets, and, as a result, avoid preferential treatment between different types of assets,” said the Treasury.
In addition to the Form 1099-DA, digital assets brokers would have to submit information on gross proceeds of their customers’ digital asset sales and exchanges to the IRS.
As the regulations are currently worded, the first year that brokers would be required to report this information would be in 2026, for sales and exchanges of digital assets that took place in 2025.
Written feedback on the proposals will be accepted until October 30, and a public hearing is scheduled for November 7.
Depending on the number of requests to speak at the hearing, a second hearing may be held on November 8.
The Treasury and IRS will then consider all feedback before publishing the finalised regulations.
Infrastructure Act opens the door
The amendment of federal tax reporting rules, as proposed by the Treasury and IRS, was made possible by the Infrastructure Investment and Jobs Act (Infrastructure Act).
Passed by Congress in November 2021, the Infrastructure Act expanded the definition of a “broker” under federal tax law to include digital asset brokers.
Crypto trading platforms are defined as brokers under these changes, as are certain digital asset wallet providers and payment processors that facilitate payments in digital assets.
In addition, the Infrastructure Act defined digital assets to mean all digital assets that use cryptography, including stablecoins and non-fungible tokens (NFTs).
When the Infrastructure Act was passed, the nonpartisan Joint Committee on Taxation (JCT) said that regulators could significantly reduce crypto tax evasion through use of “reliable and objective” third-party income verification.
According to the JCT, the Infrastructure Act could raise almost $28bn over ten years once implemented.
A long wait to tackle ‘tax cheats’
However, publication of the Treasury and IRS rules, which build on the Infrastructure Act, have been severely delayed.
As Representatives Brad Sherman (D-CA) and Stephen Lynch (D-MA) wrote in a letter to the two agencies in June, the Infrastructure Act required taxpayers to start reporting crypto transactions using Form 1099-DA in 2023.
However, that start date was contingent on the additional regulations, which were only published this week.
“The crypto industry had all of 2022 to prepare for the infrastructure law’s tax reporting requirements and now it apparently gets 2023 off as well,” said Sherman and Lynch.
“We hope Treasury/IRS will promptly release the proposed regulations so we can close the tax gap and bring the cryptocurrency industry into full tax compliance.”
Sherman and Lynch also pointed out that this issue was first identified as a priority in September 2020 — almost three years ago.
At that time, the Treasury Inspector General for Tax Administration published a report highlighting the IRS’ inability to identify crypto taxpayers, due to lack of reporting.
As time went by, other lawmakers also expressed frustration with the Treasury and IRS for not publishing the proposed rules on time.
Earlier this month, four Democrat senators wrote to the Treasury and IRS urging them to avoid further delays and avoid further costs in the form of lost tax revenue.
“Given the chance, tax evaders and the crypto intermediaries willing to aid them will continue to game the system, exploit loopholes, and siphon off billions of dollars a year from the US government,” they said. "You must not give them that chance.
“We therefore urge you to swiftly implement strong rules to close the crypto tax gap, as Congress directed."
The letter was signed by Senators Elizabeth Warren (D-MA), Bernie Sanders (I-VT.), Bob Casey (D-PA) and Richard Blumenthal (D-CN).
