The landscape of cryptocurrency taxation is changing. The U.S. Treasury Department, in collaboration with the Internal Revenue Service, finalized a rule June 28 requiring cryptocurrency platforms to report user transaction information to the government. The move aims to improve tax compliance and close loopholes exploited by some crypto investors.
Starting January 2025, custodial platforms must begin tracking and reporting digital asset transactions on new 1099 forms. By 2026, requirements will expand to include reporting the cost basis of assets, which is crucial for calculating capital gains and losses.
“These regulations are an important part of the larger effort on high-income individual tax compliance,” IRS Commissioner Danny Werfel said Friday. “We need to make sure digital assets are not used to hide taxable income.”
Here’s what you need to know about the new regulation.
Crypto customers will get a 1099 form
Previously, cryptocurrency exchanges weren’t obligated to report user transactions to the IRS. This meant it fell on individual investors to properly track and report their crypto buys, sells and trades, potentially leading to under-reporting or errors.
The new rule changes this. Crypto platforms classified as “custodial” will now be required to file a 1099 form for each user. This form — similar to those provided to customers by banks and brokers — will detail the total amount of proceeds from crypto sales and exchanges throughout the year.
For investors, the 1099 forms will simplify tax filing by providing a clear record of taxable activity. It eliminates the hassle of manually tracking transactions and reduces the risk of errors.
From the IRS’ perspective, enhanced reporting allows for better tax collection and makes it easier to spot bad actors and tax evasion.
The upcoming changes fulfill reporting requirements outlined in the Infrastructure Investment and Jobs Act, a landmark piece of legislation passed in 2021.
Which companies are impacted by the new rule?
The new rule doesn’t apply across all crypto platforms. Instead, it specifically targets custodial platforms, such as Coinbase, Binance.US and Kraken. These companies operate as centralized exchanges that hold users’ crypto assets on their behalf. When a user buys or sells cryptocurrency on a custodial exchange, the exchange holds the private keys, effectively acting as a custodian.
Decentralized finance (DeFi) platforms, on the other hand, are not currently subject to new reporting requirements. DeFi platforms operate on a peer-to-peer basis, meaning users hold their own crypto assets and manage private keys. This decentralized nature makes it harder to implement reporting mandates.
However, the Treasury Department and IRS are expected to address DeFi in the future with separate regulations.
The IRS acknowledges the complexities of implementing new reporting requirements. To ease the transition for cryptocurrency platforms, they’re offering temporary relief from reporting penalties and backup withholding for certain transactions.
New definition for stablecoins
The rule also introduces a new definition for stablecoins, a type of cryptocurrency pegged to a stable asset such as the U.S. dollar.
The Treasury classifies stablecoins as a type of digital asset, subject to the same reporting requirements as other cryptocurrencies. However, the definition acknowledges the potential for high-frequency, low-value transactions with stablecoins.
To avoid overwhelming both exchanges and the IRS with mountains of data, the Treasury incorporated optional, aggregate reporting methods exchanges can use for stablecoins rather than reporting each individual transaction.
To streamline reporting, most everyday crypto users won’t need to report individual stablecoin sales under a $10,000 annual threshold.
Bottom line
The new crypto tax rule represents a step toward better transparency and accountability in the cryptocurrency space. While the initial phase focuses on custodial platforms, regulations will evolve to include DeFi and other aspects of the crypto ecosystem. Investors should stay informed and consult with a tax professional for more guidance.
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