Decentralised exchanges and self-custodial wallets are exempt from the Internal Revenue Service’s broker reporting regulations. On June 28, the US Internal Revenue Service (IRS) unveiled the final draft of the new crypto broker reporting regulations and provided clarification on the range of industry players impacted by the new regulatory modifications. Decentralised exchanges and self-custody wallets will not be subject to the new reporting requirements, under the IRS’s revised reporting guidelines.
The IRS stated in the most recent update that after examining the numerous criticisms and remarks from industry participants, it came to the conclusion that it need “more time to consider the nuances” of fully decentralised networks.
Furthermore, stablecoins and tokenized real-world assets will be handled similarly to other digital assets and are not free from the government agency’s new reporting requirements… “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 said following the announcement of the new rule changes.
He also discussed the need to close the tax gap posed by digital assets and potential noncompliance from high-net-worth individuals.
Third-party reporting enhances compliance, as our research and experience show. Guy Ficco, chief of criminal investigations for the IRS and Werfel’s colleague, already provided this motivation by predicting that tax evasion involving cryptocurrency would increase in 2024.
Over the past year, industry lobbying groups have substantially resisted the IRS’s proposed broker restrictions, including The Blockchain Association and The Chamber of Digital Commerce. The Blockchain Association raised a red flag and objected to the IRS’s proposed broker reporting requirements in 2023, pointing out that the regulations were fundamentally at odds with decentralised finance networks.
The Blockchain Association has expressed its worries about the agency’s proposed broker provisions and the excessive regulatory burdens and compliance costs that the rules would impose on industry firms, market players, and the IRS itself.
These issues have been expressed more recently. The advocacy group claimed that the regulations will cost $256 billion in yearly compliance expenses and violate the Paperwork Reduction Act. Not long after The Blockchain Association voiced its worries about the regulatory difficulties associated with filing billions of 1099-DA tax forms, The Chamber of Commerce joined the chorus, arguing that the tax compliance documents would lead to privacy problems.