Unpacking the Implications of the IRS’s Crypto Tax Reporting Proposal

by | Sep 6, 2023

The Internal Revenue Service (IRS), in collaboration with the U.S. Treasury Department, has recently publicized a comprehensive digital asset tax proposal that could potentially bring about a paradigm shift in crypto tax reporting. The 282-page proposal, the government argues, has the potential to generate $28 billion in revenue over the next decade. However, critics argue that the proposal could exert unnecessary pressure on the rapidly growing, yet often misunderstood, cryptocurrency industry.

At the heart of the proposal is an attempt to bring clarity to the term "broker" as it applies to the cryptocurrency ecosystem. The proposal outlines the IRS's intention to increase tax reporting requirements from these brokers as a means to ensure that the agency and consumers have a better understanding of their respective obligations. 

Currently, the IRS has reporting regulations for traditional finance brokers. However, there are significant differences when it comes to crypto brokers. The breadth of information requested from crypto brokers is immense, with Lawrence Zlatkin, Coinbase’s VP of tax, noting that the data requirement would be "hundreds of times more than the annual reported transactions of any major brokerage."

According to the proposal, the term "broker" would apply to a wide range of entities within the crypto sphere. This includes centralized crypto trading platforms like Coinbase, and decentralized platforms that provide "facilitative services." However, miners and validators or stakers would not automatically be classified as brokers, and therefore, would not be subjected to the same reporting rules.

As part of the reporting requirements, brokers would be required to fill out a new 1099 form that tracks gains and losses for a wide range of transactions, including assets sold on exchanges, assets traded via DeFi, gas fees, NFT sales, and stablecoin transactions. Notably, the proposal does not clarify whether crypto is considered a security or commodity for tax purposes.

The IRS's crypto tax proposal has already drawn mixed reviews from both Washington D.C. and the larger crypto community. Critics such as Rep. Patrick McHenry (R–NC), Chair of the House Financial Services Committee, argue that the rules are overly broad and represent an “ongoing attack on the digital asset ecosystem."

Meanwhile, others like Kristin Smith, CEO of the Blockchain Association advocacy group, believe that the rules could potentially help everyday crypto users comply with tax laws, provided they are tailored to the unique nature of the crypto ecosystem.

As the IRS's proposal enters a 60-day public commenting period, set to conclude on October 30, the industry and its stakeholders will be watching closely. If approved, the new rules are expected to go into effect in 2026 for the 2025 tax year. 

While the proposed changes may raise concerns among some industry stakeholders, they also indicate that the government is taking steps to better understand and regulate the burgeoning digital asset space. What remains to be seen is how these regulations will evolve to accommodate the unique characteristics of the crypto ecosystem while ensuring fair taxation and consumer protection.