IRS releases draft of proposed reporting rules for digital asset brokers

The United States Internal Revenue Service (IRS), the agency responsible for tax collection, released proposed regulations on the sale and exchange of digital assets by brokers. Under the rules, brokers would be required to use a new form to report to simplify tax filing and cut down on tax cheating.

The proposed Form 1099-DA would “help taxpayers determine if they owe taxes, and […] avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns,” according to a Treasury Department statement. It added:

“Under current law, taxpayers owe tax on gains and may be entitled to deduct losses on digital assets when sold, but for many taxpayers it is difficult and costly to calculate their gains.”

The regulations bring digital asset reporting into line with reporting on other types of assets, the Treasury said.

The draft proposal, set to run in the Federal Register on Aug. 29, is 282 pages long. It is part of the Biden administration’s implementation of the bipartisan Infrastructure Investment and Jobs Act (IIJA), the Treasury said. IIJA provisions are expected to raise $28 billion in new tax revenue over ten years.

The proposed rules would go into effect in 2026 to reflect sales and exchanges carried out in 2025. Written comments on the proposal are being accepted through Oct. 30. At least one public hearing will be held after that date.

Judging from the initial reaction to the proposal, the IRS may have a lot of comments to field. Kristin Smith, CEO of the Blockchain Association, an industry advocacy group, released a statement that said:

“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.”

Smith added that the group and its members were looking forward to providing comment.

Reuters quoted DeFi Education Fund CEO Miller Whitehouse-Levine as saying, “Today's proposal from the IRS is confusing, self-refuting, and misguided. It attempts to apply regulatory frameworks predicated on the existence of intermediaries where they don't exist.”

Treasury & IRS released proposed regulations on the sale and exchange of digital assets by brokers:https://t.co/u6TewiS7tV

— DeFi Education Fund (@fund_defi) August 25, 2023

Patrick McHenry, chairman of the House of Representatives Financial Services Committee, called the proposal “another front in the Biden Administration’s ongoing attack on the digital asset ecosystem.”

McHenry also called the proposed rules “misguided,” and said, “Following the passage of the Infrastructure Investment and Jobs Act, numerous lawmakers of both parties made clear that any proposed rule must be narrow, tailored, and clear.”

McHenry added that he was glad that exemptions in the proposal reflected those in the Keep Innovation in America bill, which he co-wrote with Rep. Ritchie Torres. McHenry said the bill is intended to “fix the poorly constructed digital asset reporting provisions” in the IIJA.

Advocacy group Coin Center weighed in on digital asset taxation a few days earlier in a letter to Sens. Ron Wyden and Mike Crapo. The letter contained suggestions very specifically tailored to digital assets and raised privacy concerns.