U.S. Crypto Tax Proposal Lets Miners Off the Hook, Snares ‘Some’ Decentralized Exchanges

The IRS is finally proposing rules for crypto tax reporting, giving the industry its own 1099 form and declaring digital asset miners safe from the future requirements.

AccessTimeIconAug 25, 2023 at 12:45 p.m. UTC
Updated Aug 25, 2023 at 3:57 p.m. UTC
  • Crypto exchanges, some hosted wallet providers and payment processors will face new tax rules in as soon as two years.
  • The proposal, which is opening to a comment period and public hearings, would exempt miners and certain other types of activities.

The U.S. Treasury Department has finally unveiled its definition of a "broker" for the crypto industry, defining how crypto companies and investors will need to meet tax reporting obligations and answering a years-old question over whether decentralized finance platforms and miners will need to gather their users' personal data.

The Treasury Department published a nearly 300-page proposed rule on Friday in response to the 2021 Infrastructure Investment and Jobs Act saying centralized crypto exchanges, payment processors, some hosted wallet providers, some decentralized exchanges and people or entities that redeem crypto tokens they created will be bound to those reporting obligations. Moreover, Treasury unveiled a new custom tax form – the 1099-DA – that these brokers can file, resolving longstanding confusion over whether different versions of the U.S. tax form make the most sense for taxpayers.

Miners are exempt from the tax rules, but "some" decentralized finance platforms will not be, said the proposed guidance.

The big exchanges and cryptocurrency brokers would have a couple of years to get up to speed on the new tax-reporting system, which is a much longer runway than originally anticipated by the lawmakers who shepherded the 2021 Infrastructure Investment and Jobs Act – and its crypto tax provisions – into law.

The proposal is, so far, just that. The government still has to take in all the public comments by October 30 and listen to participants in a set of public hearings on November 7 and 8. Where the industry may balk is the treatment of decentralized exchanges, some of which could be roped into the reporting requirement even as they may insist that there’s no staff or management to handle such affairs. Once the Treasury and IRS have heard from everybody, the rules can be approved in a final form, so the industry will have months to lobby federal officials before anything is set in stone for the 2025 tax year. That gives some breathing room to an industry that had been braced for the overhaul to hit as soon as next year.

Since the dawn of crypto, one of the nagging drawbacks of token transactions was the uncertainty about how to pay taxes on gains. The 2021 Infrastructure Investment and Jobs Act said the Internal Revenue Services (IRS) had to work out how digital assets firms should report information on customers’ tax positions – something like a traditional brokerage’s 1099 forms that detail gains and losses.

The law, which caught the industry off-guard when it sprang from Congress two years ago, carried some major worries for crypto businesses. It wasn’t specific about whether they’ll be asked to provide information to the government that they can’t get, or whether it would affect companies that don’t have direct relationships with customers – most notably mining operations.

Friday’s documents include the Treasury push for how to define “broker” – the most controversial aspect of the 2021 law – and lays out several snapshots for how the rule may be applied to different types of entities. If implemented, the rules would begin applying to crypto exchanges in the 2025 tax year and brokers in the 2026 tax year, while giving the crypto industry its very own tax form for the newly designated brokers to use.

“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,” said a statement from the Treasury explaining the proposed rule.

While the law’s original estimate had it raising almost $28 billion in U.S. revenue in its first decade, that number was based on a very different crypto industry, during its dramatic rise before the 2022 fall. Treasury officials acknowledged there have been a lot of developments in the industry since then, but they said the revenue expectations aren’t their concern.

Who’s included?

The proposal corrals exchanges and payment processors while largely exempting miners from maintaining and filing the new reports, though it’s murkier on the topic of decentralized exchanges.

The definition of brokers, it says, “includes digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallet providers, and persons who regularly offer to redeem digital assets that were created or issued by that person.”

Treasury officials also said the reporting demand would encompass some decentralized exchanges (DEXs), if they check enough boxes to be seen as a broker. And unhosted wallet providers that also “facilitate or offer services to facilitate” their users buying or selling digital assets will be considered brokers, alongside hosted wallet providers.

A miner that receives fees for validating transactions would be exempted from the reporting requirements, as it’s not a middleman or broker for the purposes of this law, according to the documents’ embedded analysis. Similarly, any other entities that are only focused on validating transactions on a distributed ledger would be beyond reach of the rules.

Ideas welcome

The Treasury Department indicated that it and the IRS “recognize that some stakeholders may have concerns” about sharing their personal information, so they’re soliciting alternative approaches that would respect privacy. The proposal also seeks information about “technical issues” that might block DEXs from getting this information from their users.

Meanwhile, the IRS assured the industry late last year that it could keep operating under the current laws and regulations until the new tax rules are finalized. Just because the agency has finally issued its proposal, that doesn’t mean the work is anywhere near completion.

The 2021 law also called for a reporting requirement to fully identify people making crypto transactions worth more than $10,000, which seemed derived from a separate proposal from the Financial Crimes Enforcement Network (FinCEN). On the law’s requirements, there will be plenty of complicated questions to work out, such as how the firms deal with customers maneuvering funds with private wallets that the business can’t see into and how the broker records may deal with interactions on truly decentralized platforms.

Edited by Nick Baker.


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Nikhilesh De

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.