Treasury, IRS propose crypto tax rules defining DeFi platforms as brokers

On Aug 25, 2023

The U.S. Treasury Department has proposed updated tax rules aiming to streamline the crypto tax landscape, as reported by the Wall Street Journal.

The proposed rules, when fully implemented, will obligate crypto businesses to interact with the IRS in a similar fashion to traditional brokers handling stock and mutual fund portfolios. From 2026, these platforms will be required to submit annual reports on Form 1099s to the IRS and taxpayers, indicating the gross proceeds from transactions.

The proposed regulations extend to other digital assets, such as nonfungible tokens (NFTs) and decentralized finance (DeFi) platforms. This inclusion of DeFi platforms in the tax regulations has drawn criticism within the crypto industry, with the head of the DeFi Education Fund criticizing the proposal as “confusing, self-refuting, and misguided.”

As previously reported on CryptoSlate, the IRS has consistently grappled with the unique challenges posed by cryptocurrencies. Notably, the taxation of cryptocurrency staking rewards has proven a contentious issue, leading to legal disputes and calls for more precise guidelines. These latest proposals appear to be another step in the ongoing effort to provide regulatory clarity, albeit a step that has engendered a mixed response from industry stakeholders.

Outcry

The proposal to tax cryptocurrency gains has met with immediate criticism from the industry, particularly for its potential impact on decentralized operations. Key industry figures have objected to the broad scope of the proposal, arguing that it could unfairly capture entities like self-hosted wallets and decentralized exchanges that may not have straightforward pathways to compliance. Despite the potential challenges, some, like Blockchain Association CEO Kristin Smith, have recognized the potential benefits of the proposal, suggesting it could help everyday crypto users accurately comply with tax laws if implemented correctly.

Others, however, are not as hopeful. Miller Whitehouse-Levine, CEO of the DeFi Education Fund, said in a statement:

“Today’s proposal from the IRS is confusing, self-refuting, and misguided. It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don’t exist.”

The IRS and the Treasury Department are accepting feedback on the proposed regulations until Oct. 30, with public hearings scheduled for November 7-8, 2023.