IRS Issues Crypto Broker Regulations

The US Internal Revenue Service (IRS) has issued its final draft of rules for crypto brokers to report income, offering clarifications on the scope of industry participants required to follow the regulations. Decentralized protocols and self-managed crypto wallets are not included. However, stablecoins and real-world assets (RWAs) will fall under the reporting standards.

IRS commissioner Danny Werfel stated, “We reviewed thousands of public comments and believe this new guidance addresses those concerns while striking a balance between industry implementation challenges and closing the tax gap related to digital assets.”

He also relayed how the new regulations will ease tax reporting processes, “Our research and experience demonstrate that third-party reporting improves compliance. In addition, these regulations will provide taxpayers with much-needed information, which will reduce burden and simplify the process of reporting their digital asset activity.”

Digital asset transactions, referring to liquidations for fiat and exchange for other assets on centralized platforms, are already taxable under current laws. The new regulations aim to offer increased clarity. For instance, custodial brokers should report all asset sales and exchanges on their platforms. This increased reporting will facilitate end-users to file for taxes appropriately.

Werfel also mentioned how the new rules will ensure high net worth individuals (HNIs) do not evade taxes using cryptocurrencies and other digital assets. “These regulations are an important part of the larger effort on high-income individual tax compliance. We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets.”

Nevertheless, the IRS has yet to issue guidance on certain crypto transaction types. Until then, participants indulging in said transactions do not have to report them. They include wrapping and unwrapping, liquidity provisioning, staking, lending, short selling, and notional principal contracts.

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