Decentralized exchanges and self-custodial wallets are exempt from the Internal Revenue Service’s broker reporting regulations.
On June 28, the US Internal Revenue Service (IRS) unveiled the final draft of the new crypto broker reporting regulations and provided clarification on the range of industry players impacted by the new regulatory modifications.
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Decentralized exchanges and self-custody wallets will not be subject to the new reporting requirements, according the IRS’s revised reporting guidelines. The IRS stated in the most recent update that after examining the numerous remarks and grievances from industry participants, it came to the conclusion that it need “more time to consider the nuances” of fully decentralized networks.
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Furthermore, stablecoins and tokenized real-world assets will be handled similarly to other digital assets and are not free from the government agency’s new reporting requirements.
Following the announcement of the new regulations, IRS Commissioner Danny Werfel made the following remarks regarding the necessity of bridging the tax gap created by digital assets and possible noncompliance by high-net-worth individuals:
“We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets. Our research and experience demonstrate that third-party reporting improves compliance.”
Guy Ficco, the head of criminal investigations at the IRS and Werfel’s colleague, previously provided this justification by predicting that tax evasion involving cryptocurrency will rise in 2024.
Industry advocates voice concerns
Over the past year, industry advocacy groups including The Blockchain Association and The Chamber of Digital Commerce have made considerable opposition to the IRS’s proposed broker rules.
The IRS’s planned broker reporting requirements sparked alarms in 2023 when The Blockchain Association objected, noting the laws’ fundamental incompatibility with decentralized financial networks.
The IRS’s proposed broker regulations, as well as the excessive regulatory burdens and compliance costs they would impose on industry firms, market participants, and the IRS itself, have been the subject of repeated criticism from The Blockchain Association. The advocacy group claimed that the regulations would result in yearly compliance costs of $256 billion and would violate the Paperwork Reduction Act.
Not long after The Blockchain Association voiced its worries about the regulatory difficulties associated with filing billions of 1099-DA tax forms, The Chamber of Commerce joined the chorus, arguing that the tax compliance documents would lead to privacy problems.
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