Under the new rules, crypto exchanges like Coinbase, Kraken, etc would be required to send annual reports to their customers and the IRS.
The US Treasury Department and the IRS have announced new rules that would make it harder for crypto investors to evade taxes.
The proposed rules have been heavily criticised by market stakeholders.
US government propose new tax reporting rules
The US Treasury Department has proposed new crypto tax reporting rules. The rules are supposed to aid clarity on crypto tax obligations for crypto firms, investors, and users.
The rule is part of a continuing efforts by the US Congress and other regulatory authorities to crack down on crypto users who might not understand their tax obligations.
Under the new rules, crypto exchanges like Coinbase, Kraken, etc would be required to send annual reports to their customers and the IRS. Starting in 2026, exchanges must also send Form 1099s showing the gross proceeds from crypto transactions.
This is similar to brokers who manage customers’ stock investments.
The definition of a “broker” under the proposal would encompass decentralized and centralized digital asset trading platforms, cryptocurrency payment processors, and specific online wallets where users store digital assets. The rules would apply to non-fungible tokens and cryptocurrencies like bitcoin and ether.
The bipartisan Infrastructure Investment and Jobs Act of 2021 requires the proposed amendments. The legislation intends to manage digital asset concerns and close the tax gap. The Joint Committee on Taxation highlighted that standardized third-party reporting decreases evasion and increases accuracy.
“This is part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules,” the Treasury said in a statement.
Read more: SEC pressure drives Bitstamp to shutter Ether staking services in US
Market Reacts
After the news of the proposal was announced, there were a lot of criticisms of the proposed rules.
Chairman of the House Financial Services Committee Patrick McHenry said that the Biden administration was trying to kill cryptocurrency. He said that the new proposal lacked clarity.
“The Biden Administration must end its effort to kill the digital asset ecosystem in the U.S. and work with Congress to finally deliver clear rules of the road for this industry,” said McHenry, adding that any “proposed rule must be narrow, tailored, and clear.”
On X (formerly Twitter), many have lodged their complaints against the scope of the proposal.
Miller Whitehouse-Levine, the CEO of a decentralized finance (DeFi) lobbying group, said that the proposal went overboard with provisions allowing it to capture all sort of entities. He noted that the provisions of the rules covered entities like self-hosted wallets or hosted wallets.
“While acknowledging [that self-hosted wallet users ‘effectuate’ their own transfers], the proposal still somehow attempts to find third-parties [sic] ‘responsible for effectuating transfers on behalf of’ a wallet user,” he said. “In order to square the circle, the proposal asks one to accept that ‘effectuating’ doesn’t mean effectuating.”
Kristin Smith, CEO of the Blockchain Association, in a statement shortly after the proposal was released 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.”
On November 7 and 8, the US Treasury Department and IRS will hold public hearings for comments before releasing the final rules.
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