New Crypto Tax Rules Bring Clarity Amid Challenges for Decentralized Brokers

While industry advocates have welcomed the finalized crypto tax measures, non-custodial providers still face uncertain times ahead.

The Internal Revenue Service and the Treasury Department have agreed upon new crypto tax reporting rules for investors, concluding years of deliberation. At first glance, these new guidelines might seem daunting for exchanges and customers. However, the lack of clarity in the space has long been a point of frustration. The policy, which attracted 44,000 comments during a consultation, has been generally well-received.

Clearer Rules and Potential Benefits

These new regulations provide clearer rules for the crypto industry. Trading platforms will now report the gains and losses of their customers, with measures gradually coming into force over the next three years. This change aims to help taxpayers file accurate returns with less hassle.

Additionally, the IRS could see a significant increase in tax revenue, with estimates suggesting it could boost income by $28 billion over a decade.

Implications for Non-Compliant Traders

Those who have failed to declare their gains, assuming their crypto trades couldn’t be traced, are likely to face consequences. The IRS has stated its goal to “close the tax gap related to digital assets” while ensuring the new rules are practical for the crypto sector.

“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.”

IRS Commissioner Danny Werfel emphasized the importance of these regulations.

Challenges Ahead for Decentralized Brokers

A significant omission from these new guidelines is decentralized brokers—platforms that don’t take custody of coins on behalf of users. The IRS and the Treasury have acknowledged the need for more time to consider the nuances of such transactions. However, most taxpayers use centralized brokers anyway.

Industry Reactions

Erin Fennimore, VP of Tax at TaxBit, stated that the new rules “mark an important step for digital assets in the U.S.” She added that the clarity and legitimacy brought by these regulations empower enterprises and traditional financial institutions to navigate the digital asset sector confidently.

“[This] is a game-changer for the industry. This newfound regulatory certainty empowers enterprises and traditional financial institutions to navigate the digital asset sector with confidence.”

Fennimore also highlighted that these updates offer custodial exchanges the guidance needed for proper compliance, further solidifying crypto’s position within the broader financial ecosystem.

Call for Streamlined Compliance

She urged businesses in the crypto space to “streamline compliance internally,” ensuring that reports are not duplicated and reducing the chance that customers will fall foul of the taxman.

Ongoing Debates and Future Challenges

Coin Center welcomed the finalized reporting rules but noted that significant time has been wasted in reaching this point. A key issue was defining who should be considered a “broker” in the crypto space. The nonprofit argued for more than six years that this should only apply to centralized exchanges like Coinbase and Kraken. This definition has finally been adopted, but the IRS and the Treasury might have lost substantial tax revenue in the process.

“By now we could have verifiable records of taxpayer gains from centralized exchanges for half a decade. We don’t.”

Coin Center also warned that if the broker definition had remained vague, everyone from miners and validators to software developers might have had to report private transactions or face criminal punishment. This could have made the U.S. non-competitive in the field of open blockchain technologies.

Unfortunately, the issue of non-custodial entities remains unresolved, suggesting that further challenges lie ahead.

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