The IRS has proposed new regulations that would impose far-reaching reporting requirements on brokers of digital assets like cryptocurrency. The proposed rules aim to increase visibility into crypto transactions for tax compliance purposes. If finalized as proposed, the regulations would take effect starting in 2025. This post summarizes some of the key changes.
Expanded Definition of “Broker”
The proposed regulations significantly expand the definition of a “broker” beyond just traditional securities brokers. Under the new rules, many parties involved in facilitating crypto transactions would have reporting requirements.
Specifically, the definition would cover:
- Cryptocurrency exchanges that allow customers to trade different digital assets.
- Hosted wallet providers that hold the private keys to customers’ crypto assets, similar to how traditional securities custodians hold assets.
- Digital asset payment processors that accept crypto from customers and exchange it for cash or other digital assets to facilitate payments.
- Operators of crypto kiosks and non-custodial decentralized trading platforms that match buyers and sellers, even through smart contracts.
The key factor is whether these parties regularly provide services to effectuate transfers of digital assets on behalf of customers as part of an ongoing trade or business. This is referred to in the regulations as “standing ready” to facilitate crypto sales for customers.
Even if facilitating crypto transactions is not a platform’s primary business activity today, they could still meet the definition of a broker if they regularly provide services that effectuate crypto transfers for customers.
The goal is to ensure comprehensive reporting regardless of whether the broker takes custody of assets or what technology is used to facilitate transfers. This aims to assist taxpayer compliance and prevent evasion.
Reporting of Crypto Transactions
Starting on January 1, 2025, brokers would be required to report extensive information to the IRS about customers’ crypto transactions. For each digital asset sale, the report would include the customer’s name, address, taxpayer ID number, details on the type and amount of crypto sold, the sale date/time, gross proceeds, and other transaction information.
Brokers would also have to report adjusted basis for certain crypto assets starting in 2026. This basis information is needed to help taxpayers properly calculate gains and losses. It is important to note that self-custody and transferability among wallets & exchanges make this basis information inherently difficult to determine. The IRS does not propose a way for brokers to remedy this situation, only that basis must be reported for each sale transaction.
Beyond just sales of crypto for cash or other crypto, reporting would also be required for exchanges of crypto for other property or services. The rules aim to cover the many different types of crypto transactions. Again, this would be difficult to implement as crypto payments for goods or services are generally done as transfers from the payers wallet to the payees wallet. It would be nearly impossible for a broker to determine which transfers were payments vs other types of transfers.
Allocation of Fees on Trades
A key issue that arises with crypto is how to allocate fees on trades, particularly when exchanging one digital asset for another. The proposed regulations provide that for trades between different crypto assets, any fees must be split evenly between the asset disposed of and the asset acquired. This aims to balance the economics when the assets exchanged may not be equal in value.
Basis Allocation Methods – Identifying Which Crypto Assets are Sold
Another challenge with crypto is tracking basis when taxpayers buy units at various times and prices. The regulations provide rules on identifying which specific units are deemed sold when a taxpayer does not sell their entire holdings of a particular crypto asset.
Basic FIFO (first-in, first-out) identification would apply for crypto held in hosted wallets with brokers. For non-custodial wallets, taxpayers could specifically identify units sold if tracked properly. Otherwise FIFO applies.
Rules for Non-US Brokers
Non-US based crypto brokers may have reporting requirements if they do substantial digital asset business with US persons. Rules address what documentation is needed to treat customers as foreign and exempt.
Coordination with Other Reporting Rules
The regulations coordinate digital asset reporting with existing rules for securities, real estate transactions, and barter exchanges. This aims to avoid duplicative reporting obligations.
Intended Effects
Not much in the proposed regulations changes the way crypto taxes are currently calculated. Rather, the focus is on the implementation of the new reporting rules under the TCJA and the Infrastructure Bill. The far-reaching reporting rules intend to provide much greater visibility to the IRS of crypto transactions which could significantly enhance tax compliance in an area the IRS has identified as prone to non-reporting.
However, the rules are likely to create a substantial implementation burden for crypto brokers that will need to develop new reporting systems. The devil will be in the details as brokers evaluate the precise requirements. With a 2025 effective date, the IRS is providing a lengthy runway for implementation.