Treasury Aims to Snag Tax Cheats With Crypto Broker Proposal

US-based cryptocurrency exchanges such as Coinbase Global Inc. and Kraken would have to report detailed information on their clients’ transactions to the IRS starting in 2026 under a new Treasury proposal.

(Bloomberg) — US-based cryptocurrency exchanges such as Coinbase Global Inc. and Kraken would have to report detailed information on their clients’ transactions to the IRS starting in 2026 under a new Treasury proposal.

The proposed regulations from the Treasury Department and Internal Revenue Service offer clarity on reporting rules enacted in 2021 to curb crypto-related tax evasion by offering more transparency into customer trades. At the time, it was estimated the measure would raise up to $28 billion in additional revenue over 10 years, according to the Joint Committee on Taxation.

The IRS has pointed to unpaid digital-asset taxes as a contributor to the tax gap — the difference between taxes owed and collected, which totals more than $500 billion per year. 

The proposed regulations would help “crack down on tax cheats while helping law-abiding taxpayers know how much they owe on the sale or exchange of digital assets,” Treasury said in a news release.

Under the rules, platforms that facilitate the buying and selling of digital assets, also known as crypto brokers, would have to track and report key information, such as customers’ capital gains and losses — similar to existing requirements for stock and bond brokers. The term “brokers” would include digital-asset trading platforms, payment processors and certain hosted wallets, according to the regulations unveiled Friday. The proposal would also extend reporting requirements to real estate brokers in cases where digital assets are used to purchase property. 

“The sheer magnitude of this data requirement would be hundreds of times more than the annual reported transactions of any major brokerage – and goes well beyond the scope of pursuing wealthy tax cheats,” Coinbase Vice President of Tax Lawrence Zlatkin said in a statement. “The practicality of the IRS’s requirement to report – let alone enforce – this incredible minutia of taxpayer data is questionable at best,” he added.

Crypto firms were supposed to begin recording that data at the start of this year, and file reports to the IRS and investors next year. But the government in December delayed those requirements until it releases final rules.

Under the proposal, brokers would be required starting in 2026 to report gross proceeds for sales of digital assets on or after Jan. 1, 2025. Adjusted basis reporting — which would incorporate how much a customer paid for the assets — would kick in the following year for sales on or after Jan. 1, 2026. The separate dates give brokers more time to adjust to the new rules, a Treasury official said Thursday on a call with reporters.

“There’s obviously an immediate investment cost to brokers that will have to implement this and digest and figure out how to do it,” said Miles Fuller, head of government solutions at crypto tax software company TaxBit. “But the longer term outlook in my view, is good for the industry because it’ll help bring more mainstream adoption.”

DeFi, NFTs Included

The reporting requirements would apply to both centralized and decentralized exchanges. “This decision was made because the reasons for requiring information reporting on dispositions of digital assets do not depend on the manner by which a business operating a platform effects customers’ transactions,” Treasury said in the proposed regulations. 

The department said it was concerned that if it treated the two types of trading platforms differently, crypto firms might change their operations to avoid reporting or customers would seek out certain platforms to make it easier for them to evade taxes. 

“Today’s proposal from the IRS is confusing, self-refuting, and misguided,” said Miller Whitehouse-Levine, chief executive officer of the DeFi Education Fund. “It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don’t exist, an ‘unsquarable’ circle that the proposal itself acknowledges.”

The IRS also will create Form 1099-DA for brokers to send to taxpayers to determine what they owe.

The agency last year replaced “virtual currency” with “digital assets” on its 1040 income tax forms as a precursor to issuing regulatory guidance. Previously, it wasn’t clear whether nonfungible tokens, or NFTs, were considered virtual currency. 

Treasury makes clear in its proposal that the new broker reporting rules would apply to all types of digital assets, including NFTs. “Given that NFTs are popular investments, the buying and selling of NFTs raise tax administration concerns similar to the concerns associated with other types of digital assets,” the department said in the regulations. 

Regulators Ramp Up

The proposal marks the latest attempt by the US government to rein in the digital-asset market — efforts that have ramped up since the collapse of crypto exchange FTX and other high-profile firms in the industry last year, which in turn caused cryptocurrency prices to drop.

The proposed rules make clear that companies that validate crypto transactions through mining or staking aren’t subject to the reporting requirements, a position Treasury signaled it would take last year and one that lawmakers on both sides of the aisle support.

House Financial Services Committee Chairman Patrick McHenry, a North Carolina Republican, said he was glad to see that exemption included, but that the proposal “fails on numerous other counts.” He called the regulation “another front in the Biden Administration’s ongoing attack on the digital asset ecosystem,” in a post to the social media platform X (formerly Twitter). 

Conversely, Senator Elizabeth Warren, a Democrat from Massachusetts, didn’t think the Treasury proposal went far enough. “A strong rule is essential to prevent wealthy tax cheats from hiding income in digital assets, and one should be implemented by the end of the year,” she said in a statement. 

Comments are due by Oct. 30. The government will hold a hearing on the proposal on Nov. 7 if the public requests it. It’ll hold a second hearing on Nov. 8 if the number of requests to speak exceeds what can be accommodated in one day. 

Kristin Smith, chief executive officer of the Blockchain Association, said in a statement that the crypto trade group is looking forward to weighing in on the regulations. 

“If done correctly, these rules could help provide everyday crypto users with the necessary information to accurately comply with tax laws,” she said. “However, it’s important to remember that the crypto ecosystem is very different from that of traditional assets, so the rules must be tailored accordingly and not capture ecosystem participants that don’t have a pathway to compliance.”

(Updates with comments from Coinbase in the sixth paragraph.)

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