The U.S. Treasury Department and the Internal Revenue Service (IRS) issued final regulations on digital asset transactions in 2024. The introduction of this regulation is the result of the Infrastructure Investment and Jobs Act to promote the strengthening of cryptocurrency tax supervision. The purpose is to standardize the tax reporting process for cryptocurrency and decentralized finance (DeFi) transactions and greatly improve tax compliance.
The regulation focuses on imposing clear requirements on DeFi brokers. It clearly defines the reporting obligations of DeFi brokers and requires them to disclose relevant transaction details in detail. This means that DeFi brokers need to accurately record various information involved in the transaction, including transaction amount, transaction asset type, information of both parties to the transaction, and other key data. At the same time, the regulation requires DeFi brokers to collect users Know Your Customer (KYC) information in order to better track the source and destination of transactions, identify potential risky behaviors, and ensure that the entire transaction process is carried out within a legal and compliant framework.
Finally, the regulation is scheduled to take effect on January 1, 2027. In order to give relevant practitioners enough time to adapt, the regulation has set a transition period. During this period, starting from 2026, according to the IRSs vision, brokers will need to collect data that meets the requirements of the final regulation. The purpose of this is to give brokers enough time to adjust their business processes, technical systems and other related arrangements, so that they can smoothly meet all the requirements after the regulation takes effect, and avoid confusion or violations in the new regulatory environment.
However, although these requirements in the regulations are intended to strengthen supervision from the perspective of tax compliance, they have also caused a lot of controversy in the industry. Some practitioners believe that to a certain extent, it may affect the efficiency of transactions and the enthusiasm for innovation. For example, when cryptocurrency transactions are already quite complicated, adding more reporting and information collection will make the transaction process more cumbersome and may also limit the development space of some emerging trading models or financial instruments. Of course, on the other hand, the meaning of DeFi itself lies in decentralization. The release of the document now can be said to have completely stripped away the essence of DeFi and abandoned the meaning of decentralization. Therefore, whether the regulations can be successfully implemented in the end remains to be verified.
Next, let’s take a closer look at the core content of this document and its possible impact on digital asset transactions:
1. New information reporting requirements
The regulation mainly imposes information reporting requirements on brokers. Brokers are defined as persons who prepare to make sales in their daily business, including custodial and non-custodial digital asset brokers. They mainly include the following categories:
• Custodial digital asset trading platform operators: These platform operators are responsible for safekeeping clients’ digital assets and conducting transactions between clients.
• Digital asset custody wallet providers: These wallet providers are also responsible for safekeeping of customers’ digital assets.
• Payment Processors (PDAPs): These processors are responsible for processing payments in digital assets, such as payments made through blockchain networks.
• Digital asset self-service terminals: These terminal devices allow users to directly trade digital assets.
Broker Report : Brokers are required to report in detail the total income of their clients from digital asset transactions. This includes not only the trading profits of traditional cryptocurrencies such as Bitcoin and Ethereum, but also the income from emerging digital asset transactions, such as the exchange of non-fungible tokens (NFTs). At the same time, the adjusted basic information is also within the scope of the report, which may involve the cost of the initial investment, various fee adjustments during the transaction, etc. The IRS hopes that through this comprehensive reporting requirement, the tax department will be able to more accurately grasp the income situation in digital asset transactions. In the past, some customers may have taken advantage of the concealment of digital asset transactions to conduct undeclared income operations, but now the brokers reporting system can control the source of the transaction.
In the real estate transaction market, when it comes to the use of digital assets for payment, real estate reporters are also given corresponding reporting responsibilities.
2. Clear definitions and classifications
The regulation clarifies the definition of digital assets and the scope of custodial and non-custodial industry participants.
Specifically, in this document, digital assets are clearly defined as a representation of value recorded on a cryptographically protected distributed ledger, a feature that clearly distinguishes it from cash. This form of value recording based on encryption technology and distributed ledger technology is the key to distinguishing digital assets from traditional assets. It covers a wide variety of types, among which cryptocurrencies are the most well-known types, such as Bitcoin and Ethereum. In addition, there are also stablecoins, NFTs, etc.
At the same time, the document carefully distinguishes between custodial and non-custodial digital asset industry participants and clearly defines their respective responsibilities and obligations.
Custodian participants bear the responsibility of asset custody in the entire digital asset transaction chain. They need to ensure the safe storage of digital assets, adopt advanced encryption technology and security protection mechanisms to prevent digital assets from being stolen or tampered with. During the transaction process, custodian participants must also conduct a preliminary review of the legality and compliance of the transaction, such as verifying the identity information of both parties to the transaction, the source and destination of the digital assets in the transaction, etc.
Although non-custodial participants do not bear direct responsibility for asset custody, they play an important role in digital asset transaction matching and market information provision. They need to comply with relevant market competition rules, ensure that the transaction information provided is true, accurate and complete, and must not engage in fraud, market manipulation and other unfair behaviors. They must also actively cooperate with the requirements of regulatory authorities and provide necessary transaction data and information for supervision and management.
3. Tax impact
Digital asset transactions are clearly considered taxable events under the new regulations. Whether it is the exchange between cryptocurrencies, investment income of digital assets, or related transactions involving non-fungible tokens (NFTs), as long as there is a transfer of value and income is generated, it is included in the taxable category. The IRS believes that taxpayers need to report these transactions truthfully in the federal income tax return. This may make investors consider possible cost deductions in addition to risk-return when participating in investments, such as initial investment costs, transaction fees and other related expenses.
4. Technical and operational requirements for brokers
• System upgrade: With the update of regulations related to digital asset trading, brokers and other industry participants are facing the challenge and demand of system upgrade. The new reporting requirements cover more detailed and comprehensive collection, collation and analysis of transaction information. For example, brokers must not only record traditional basic information such as transaction amount, but also pay attention to complex information such as the specific type of digital assets, transaction timestamps, source addresses and destination addresses of related digital assets. Existing trading systems may not be able to meet these new requirements in terms of data structure design, data storage capacity and information processing logic. Therefore, in order to ensure that relevant information can be reported accurately and in accordance with regulations, they must upgrade their existing trading systems. This may involve adopting more advanced database management systems to support rapid storage and efficient query of massive transaction data; introducing intelligent algorithms to automatically identify and classify different types of digital asset transactions, so as to accurately extract the required reporting information; optimizing the systems user interface to facilitate staff to enter and review new information fields, etc.
• Data retention: The document clearly stipulates that brokers need to retain transaction-related information for at least seven years. This requirement sets higher standards for brokers data management capabilities. The amount of data in digital asset transactions is huge and continues to grow. Long-term data retention means that sufficient storage space is needed to carry this data. At the same time, in order to ensure the integrity and availability of the data, effective data maintenance work is also required during the seven-year retention period, such as regular data backup to prevent data loss, and establishing data indexes for quick retrieval of data for specific transactions. This not only requires brokers to invest more hardware resources, such as server storage space, but also requires a certain amount of human and material costs to manage the life cycle of data. Moreover, when the tax authorities need this data for review or tax enforcement activities, brokers must be able to provide relevant data quickly and accurately, which also puts a strict test on the brokers internal management process and data response mechanism.
5. International coordination
In todays globalized context, the cross-border nature of digital asset transactions has become increasingly prominent. The document released by the U.S. Treasury Department and the Internal Revenue Service (IRS) mentioned that information reporting rules will be coordinated with other countries. Cross-border digital asset transactions have always been a difficult point of supervision because they involve laws, regulations, tax policies and regulatory environments in different countries. Different countries may have different definitions, classifications and tax treatments of digital assets, which can easily lead to regulatory loopholes. For example, some digital asset transactions may not be effectively regulated in some countries and evade tax or compliance reviews.
Therefore, by coordinating information reporting rules, the US government hopes to establish a more unified information sharing and exchange mechanism among countries. For example, when it comes to cross-border digital asset transactions between US investors and investors from other countries, the regulatory authorities of both countries can obtain real information about the transaction more efficiently based on the coordinated rules. This helps to ensure the transparency of cross-border digital asset transactions and avoid illegal transactions caused by information asymmetry. At the same time, the consistency of rules can reduce market distortions caused by policy differences among countries, allowing digital assets to be traded in the global market according to unified and fair standards, and promoting the healthy and orderly development of the global digital asset market. Moreover, this international coordination can also enhance the efficiency of international tax cooperation, prevent taxpayers from taking advantage of international regulatory differences to evade taxes, and maintain the effectiveness of the global tax system.
In general, due to the anonymity, cross-border nature and complexity of cryptocurrency transactions, the IRS believes that there have been many unreported income and erroneous reporting in the past. Therefore, this time, the main information reporting responsibilities of various participants are stipulated, such as brokers need to report customer transaction information, and real estate reporters need to report real estate transactions paid for by digital assets, etc., hoping to establish a relatively complete transaction information tracing system and improve tax compliance.
For practitioners in the crypto industry, on the one hand, accelerated compliance progress will help the development of the industry in the long run, but on the other hand, gradually deviating from the mission of decentralized finance may bring more challenges to industry practitioners.
