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US Treasury issues crypto tax regime for 2025, delays non-depository rules
The U.S. Treasury Department has enacted a long-awaited tax regime for cryptocurrency transactions, setting reporting rules for digital asset brokers that will go into effect with transactions made next year, but it has delayed some of its most controversial rulings on brokers who never take possession of customers’ cryptocurrencies.
New Internal Revenue Service (IRS) rules for cryptocurrency brokers released Friday require trading platforms, hosted wallet services and digital asset kiosks to submit information about the movements and earnings of customers’ assets. Those assets will also include, in very limited circumstances, stablecoins like Tether’s (USDT) and Circle Internet Financial (USD Current Account) and high-value non-fungible tokens (NFTs), though the IRS explicitly refuses to settle the long-running battle over whether the tokens should be considered securities or commodities.
While this rule focuses on the more obvious platforms like Coinbase Inc. (COIN) and Kraken, non-custodial cryptocurrency businesses like decentralized exchanges and unhosted wallet providers are only getting a temporary reprieve from new deposit requests. Popular cryptocurrency platforms that handle a “substantial majority” of transactions can no longer wait for the rules, the agency argued, but the other issues need further study and will get their own rule “later this year.”
“The Treasury Department and the IRS disagree that noncustodial participants should not be treated as brokers,” according to explanations included in Friday’s rule. “However, the Treasury Department and the IRS would benefit from further consideration of issues involving noncustodial participants.”
The final rule for most commonly used brokers begins with transactions on January 1, 2025, leaving crypto taxpayers with another filing year to figure out their 2024 returns on their own in the meantime, though cryptocurrency firms have already moved to adapt. The IRS has given brokers an extra year until 2026 to start having to track the “cost basis” for assets, or the amount each was originally purchased for.
Real estate transactions paid for with cryptocurrency after January 1, 2026, will also have to be reported, the regulation said. “Real estate reporting persons” will have to submit the fair market value of the digital assets used in such transactions.
A 2021 congressional infrastructure bill set the stage for the Treasury IRS to establish this formal approach to cryptocurrencies, and the industry has since been frustrated by a continually delayed process. The potential proposal attracted 44,000 public comments.
“Thanks to the bipartisan Infrastructure Investment and Jobs Act, digital asset investors and the IRS will have better access to the documentation they need to easily file and review tax returns.
“returns,” said Aviva Aron-Dine, acting assistant secretary for tax policy, in a statement. “By implementing the law’s reporting requirements, these final regulations will help taxpayers more easily pay the taxes they owe under existing law, while reducing tax evasion by wealthy investors.”
IRS Commissioner Danny Werfel said the final rule took into account public comments.
“These regulations are an important part of the broader high-income tax compliance effort. We need to ensure that digital assets are not being used to hide taxable income, and these final regulations will improve compliance detection in the high-risk digital asset space,” he said. “Our research and experience demonstrate that third-party reporting improves compliance. Additionally, these regulations will provide taxpayers with much-needed information that will reduce the burden and simplify the process of reporting their digital asset activity.”
The process of drafting this controversial tax law has caused widespread concern from the sector where the U.S. government would go overboard by imposing impossible requirements on miners, online forums, software developers and other entities that help investors but that would not traditionally be considered brokers and do not have the customer information or disclosure infrastructure that would allow them to comply.
The IRS said it recognizes that cryptocurrency brokers should not include those “who provide validation services without providing any other functions or services, or persons who are engaged solely in the business of selling certain hardware or licensing certain software, the sole function of which is to allow individuals to control the private keys used to access digital assets on a distributed ledger.”
U.S. tax regulators estimate that about 15 million people will be affected by the new rule and about 5,000 businesses will have to comply.
The IRS said it sought to avoid some burdens for stablecoin users, especially when they are used to buy other tokens and in payments. In practice, a typical cryptocurrency investor and user who earns no more than $10,000 in stablecoins in a year is exempt from reporting. Stablecoin sales, the most common in cryptocurrency markets, will be counted collectively in an “aggregate” report rather than as individual transactions, the agency said, although sophisticated, high-volume stablecoin investors will not qualify. The agency said these tokens “unambiguously fall within the statutory definition of digital assets because they are digital representations of the value of fiat currency that are recorded on cryptographically protected distributed ledgers,” so they could not be exempted despite their goal of sticking to a stable value. The IRS also said that completely ignoring such transactions would “eliminate a source of information about digital asset transactions that the IRS can use to ensure compliance with taxpayer reporting requirements.”
But the IRS added that if Congress passes one of its bills aimed at regulating stablecoin issuers, the tax rules may need to be revised.
The IRS also faced complex legal arguments in determining how to handle NFTs, according to its extensive brief on the subject, and the agency decided that only taxpayers who earn more than $600 in a year from their NFT sales need to have their aggregate proceeds reported to the government. The resulting returns will include the taxpayers’ identifying information, how many NFTs were sold, and what the profits were. “The IRS intends to monitor NFTs reported under this optional aggregate reporting method to determine whether this reporting impedes its tax enforcement efforts,” according to the rule’s text. “If abuse is detected, the IRS will reconsider these special reporting rules for NFTs.”
As part of those efforts, the IRS released its definition of digital assets and the various activities covered by the regulations on Friday.
The IRS also established a safeguard for certain reporting requirements “that taxpayers may rely on to allocate the unused digital asset base to the digital assets held in each of the taxpayer’s wallets or accounts beginning on January 1, 2025.”
Earlier this year, the US tax agency had released a Form 1099-DA proposed to track cryptocurrency transactions, the form that millions of cryptocurrency investors would receive from their brokers.
The IRS made clear Friday that any attempt in this rule to assign buckets to cryptocurrencies is not intended to strengthen a side in the industry’s ongoing battle with regulators, particularly the U.S. Securities and Exchange Commission (SEC), over whether tokens are securities or commodities. That debate is now raging in several cases before federal judges, and while the SEC is willing to admit only bitcoin (BTC) is definitely out of the agency’s reach, Commodity Futures Trading Commission Chairman Rostin Behnam said that Ethereum’s ether (ETH) it’s also a commodityThat position “is outside the scope of these final regulations,” the IRS explained.
Nikhilesh De contributed reporting.