New U.S. Tax Regulations on Cryptocurrency Assets Spark Industry Controversy

Recently, the Internal Revenue Service (IRS) in the United States released final regulations regarding brokers reporting the sale and exchange of digital assets, marking another upgrade in the U.S. tax regulation of encryption assets. Starting from January 1, 2025, all brokers holding customers' sold digital assets (including encryption asset trading platforms, payment processors, and custodial wallet providers) must use the new 1099-DA form to report core information about each transaction in detail to the IRS. It is noteworthy that DeFi front-end service providers have also been identified as encryption asset brokers and are required to fulfill corresponding tax reporting obligations.

At the same time, Michele Korver, the head of the encryption department at a well-known venture capital firm, stated on social media that the new broker report rules issued by the U.S. Treasury pose a direct threat to the development vision of DeFi and may hinder the future of DeFi innovation in the U.S. The firm supports multiple industry organizations in filing lawsuits, accusing the IRS and the Treasury of exceeding their statutory authority, violating the Administrative Procedure Act (APA), and even being unconstitutional.

Evolution of U.S. Cryptocurrency Asset Tax Regulation

Looking back at the history of the United States' tax regulation of encryption assets, its evolution path is relatively clear. In 2014, the IRS issued Notice 2014-21, officially defining cryptocurrency as property rather than currency, and establishing the corresponding tax treatment framework. In 2021, the signing of the Infrastructure Investment and Jobs Act (IIJA) required all transactions involving encryption assets to be reported and introduced Form 8300, expanding the reporting scope of encryption asset transactions to include Form 1099, which further elevated the tax regulation of encryption asset transactions to a new height.

The newly released "General Income Reporting Requirements for Brokers Providing Periodic Digital Asset Sales Services" (hereinafter referred to as "the Reporting Requirements") elaborates on a series of tax reporting regulations that brokers must follow when providing digital asset sales and trading services to clients. It clarifies the definition of brokers, including traditional digital asset trading platforms, payment processors, custodial wallet providers, and decentralized finance (DeFi) service providers that execute transactions automatically through software or smart contracts.

Form 1099-DA is a tool used by the IRS to address the increasing frequency of cryptocurrency transactions and the challenges of tax regulation. This form requires brokers to disclose detailed information about the dates and types of transactions, accurately report transaction amounts, and cover total gains as well as potential gains, losses, and cost basis information. Additionally, brokers must provide comprehensive information about investors, including their names, addresses, and social security numbers, and extend this to specific types, quantities, and fair market values of digital assets.

The Impact and Controversies of the New Regulations

The introduction of new regulations has imposed stricter tax reporting requirements on cryptocurrency asset brokers. To meet the stringent reporting standards, brokers must fully implement KYC policies, which will lead to a significant increase in their operational costs and an increase in compliance difficulties, posing new challenges for the entire industry.

From the perspective of anti-money laundering, counter-terrorism financing, and anti-tax evasion, the lack of transparency in encryption assets may constitute a loophole in the financial defenses. Strict reporting requirements help to timely identify and block money laundering paths, cut off funding sources for terrorists, and maintain national security and social stability. At the same time, the reporting obligations followed by brokers assist tax authorities in accurately identifying tax evasion behaviors, strengthening tax management, and upholding the fairness and authority of the tax system.

However, the "Report Requirements" have had a significant impact on the DeFi sector. DeFi provides flexible and efficient financial services outside the traditional financial system, thanks to its decentralization and anonymity. However, the strengthening of regulations may seriously challenge these characteristics. The 1099-DA form requires brokers to disclose investors' wallet addresses and transaction amounts, and the implementation of KYC policies resulting from this will undermine the anonymity of DeFi, forcing investors to change their trading habits, provide real identity information, and reduce trading privacy.

In addition, to meet the reporting requirements, DeFi platforms need to increase resource and energy investment to collect, organize, and report user transaction data, which will undoubtedly increase operational costs, indirectly affecting the autonomous operation of smart contracts, adding human intervention, and adversely impacting the autonomous operation and decentralized governance of smart contracts. More critically, the "reporting requirements" may have far-reaching effects on the DeFi ecosystem, challenging the core mission of DeFi to popularize the ease of use of currencies and payment methods, and to promote the globalization and decentralization of financial services.

The "Report Requirements" not only affect DeFi but also stir waves throughout the entire encryption industry. The new regulations put dual pressure of compliance and operational costs on cryptocurrency brokers, forcing them to allocate more resources to meet regulatory demands. This could lead to small or startup brokers exiting the market due to the unbearable burden, intensifying market competition and industry reshuffling. At the same time, the new regulations have sparked controversies over privacy, data security, and constitutional rights; they also pose a potential threat to innovation and development in the encryption industry.

Conclusion

The rules for encryption brokers aim to enhance tax transparency, combat illegal activities, and ensure tax fairness and market order. However, the urgency of their implementation has also raised concerns about the development of the encryption industry. In the context of the rapid development of the encryption industry, finding a balance between encouraging innovation and strengthening regulation has become an urgent issue that needs to be addressed.

Despite the tightening of regulations that may cause some turmoil in the industry, the resilience and innovative capabilities demonstrated by the encryption industry always allow it to rise from the ashes. Although the future development path is filled with uncertainties, the encryption industry still has broad prospects and infinite possibilities.