The Internal Revenue Service (IRS) has released the final version of its controversial “broker rule” guidance, delaying a decision that could later affect non-custodial platforms. Crypto lobbyists had feared the ambiguous language in earlier drafts would have a harmful impact on many parts of the crypto industry, from wallet providers to decentralized exchanges.
Broker Rule Finalized, but DeFi Regulation Delayed
The IRS first published new proposed regulations on tax reporting requirements for cryptocurrency brokers in August 2023, sparking concerns that the ambiguous language could negatively impact various sectors of the crypto industry. The final guidance, released late Friday, clarifies that exchanges like Kraken and Coinbase will be subject to the new rules, which will go partially into effect in 2025.
However, the rules that would have imposed potentially impossible and privacy-invasive reporting and KYC requirements on decentralized, non-custodial protocols have been put on hold. The filing states that “the Treasury Department and the IRS would benefit from additional consideration of issues involving non-custodial industry participants.”
“Good news: They agree that custodial brokers are, well, brokers,” said Coin Center Chief Communications Office Neeraj Agrawal. “Our concern is whether or not a self-custodial application (like a DEX) that is just code with no central authority would be considered a broker too.”
The proposed regulations, which build on efforts to expand IRS regulation over crypto transaction tax reporting in the 2021 Infrastructure Investment and Jobs Act, would have not only expanded the number of entities treated as brokers but also vastly expanded the type of entities obligated to report under 1099 tax reporting requirements (and crypto-specific 1099-DA form).
We have been waiting to learn how the IRS will interpret the broadly defined term "broker" in a provision sneakily added to the 2021 Infrastructure Bill.
Today we got the guidance.
Good news: They agree that custodial brokers are, well, brokers.
Our concern is whether or… pic.twitter.com/vTPQIplDth
— Neeraj K. Agrawal (@NeerajKA) June 28, 2024
Compliance Costs Remain a Concern
The Blockchain Association had previously complained about the potential for hefty compliance costs of the rule, estimating that the law would add 8 billion 1099-DA tax forms to process and compliance costs of $254 billion. This is because nearly any trade involving a blockchain-based asset, from NFTs to stablecoins, would fall under the 1099 reporting umbrella.
Consensys Senior Counsel and Director of Global Regulatory Matters Bill Hughes clarified that the guidance “does NOT finalize rules pertaining to unhosted wallets and related non-custodial software offerings” and that “they say those offerings are still under review as possibly being brokers, and they will finalize their status later.”
The delay in finalizing the rules for non-custodial platforms suggests that the IRS has taken note of the pushback from the crypto industry and is still considering the implications of its proposed regulations.