Treasury, IRS Propose Cryptocurrency Tax Rules, Defining DeFi Platforms as Brokers

The rules would subject cryptocurrency intermediaries, including supposedly decentralized platforms, to the same reporting requirements as traditional brokers and asset managers.

The U.S. Department of the Treasury has proposed updated tax rules aimed at simplifying the cryptocurrency tax landscape, according to media reports.

The proposed rules, once fully implemented, would force cryptocurrency businesses to interact with the IRS in a similar way to traditional brokers that handle portfolios of stocks and mutual funds. Beginning in 2026, the platforms will be required to file annual reports on Form 1099 with the IRS and taxpayers stating the gross proceeds from the transactions.

The proposed regulations apply to other digital assets such as non-fungible tokens (NFTs) and decentralized finance (DeFi) platforms. The move to include DeFi platforms in tax regulations has drawn criticism within the crypto industry, with the head of a DeFi education fund criticizing the proposal as "confusing, contradictory and misleading."

As the outlet has previously reported, the IRS has been grappling with the unique challenges cryptocurrencies present. Notably, the taxation of cryptocurrency staking rewards has proven to be a contentious issue, leading to legal battles and calls for more precise guidelines. These latest proposals appear to be another step in an ongoing effort to provide regulatory clarity, although the move has drawn mixed reactions from industry stakeholders.

Outcry

The proposal to tax cryptocurrency gains was immediately met with criticism from the industry, particularly its potential impact on decentralized operations. Key industry figures objected to the proposal’s broad scope, arguing that it could unfairly cover entities such as self-custodial wallets and decentralized exchanges that may not have an immediate path to compliance. Despite the potential challenges, some, such as Blockchain Association CEO Kristin Smith, have recognized the potential benefits of the proposal, saying that if implemented properly, it could help everyday cryptocurrency users accurately comply with tax law.

Others, however, are less hopeful. DeFi Education Fund CEO Miller Whitehouse-Levine said in a statement:

"Today's IRS proposal is confusing, contradictory, and misleading. It seeks to apply a regulatory framework based on the existence of intermediaries where they do not exist."

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