IRS Finalizes New Crypto Tax Reporting Rules

by | Jul 1, 2024 | Cryptocurrency | 0 comments

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Starting in 2026, cryptocurrency platforms will be required to report transactions to the Internal Revenue Service (IRS), with decentralized platforms that do not hold assets themselves being exempt from this mandate. These new regulations, finalized by the IRS and the U.S. Department of Treasury on Friday, implement a provision of the Biden Administration’s Infrastructure Investment and Jobs Act, which was passed in 2021.

Although gains from selling cryptocurrencies and other digital assets have always been taxable, the lack of standardization in reporting these gains to both individual investors and the government has been an issue. The new regulations will change this by mandating that crypto platforms provide a standard 1099 form for transactions starting in 2025, with the first reports due in 2026. This form is similar to those used by banks and traditional brokerage firms, thereby simplifying the tax filing process for cryptocurrency investors.

The IRS aims not only to simplify tax reporting for crypto transactions but also to address tax evasion. IRS Commissioner Danny Werfel emphasized the importance of ensuring digital assets are not used to hide taxable income and stated that the new regulations will enhance the detection of noncompliance in the high-risk area of digital assets.

These regulations specifically target “custodial” platforms, such as Coinbase, which take possession of customer assets. After significant lobbying from the crypto industry, decentralized brokers that do not take possession of assets have been excluded from these rules. The Blockchain Association, an industry lobbying group, praised this exclusion, highlighting the strong influence of the crypto community.

The Treasury Department and IRS have indicated that they will address decentralized brokers in a separate set of regulations. This approach acknowledges the distinct operational differences between custodial and non-custodial platforms, ensuring that the regulatory framework is appropriately tailored to each type of platform.

In summary, the finalized regulations by the IRS and the Treasury Department mark a significant step towards standardized crypto tax reporting, aiming to simplify tax compliance for investors and enhance the IRS’s ability to detect tax evasion. While custodial platforms will need to adapt to these new reporting requirements, decentralized platforms will remain exempt for now, with future regulations expected to address their unique circumstances. These changes reflect ongoing efforts to integrate digital assets into the broader financial regulatory landscape.

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