The US Treasury has unveiled new regulations that will require crypto custodial brokers to report their users’ transactions to the IRS starting in 2026. These regulations aim to improve tax compliance among high-income individuals and prevent tax evasion in the crypto space. The brokers will need to report gross proceeds on digital asset sales from 2025 onwards and provide tax-related information on certain digital assets in 2027 for the previous year. This move is seen as a significant step forward in crypto taxation and will provide investors with a simple 1099 form for reporting their digital asset activities.
The new regulations specifically target custodial digital asset trading platform operators, hosted wallet providers, digital asset kiosks, and certain digital asset payment processors. These brokers cover the majority of digital asset transactions and capture a large number of taxpayers. They will be required to disclose movements and gains of customer assets, including stablecoins and high-value NFTs. Additionally, they must report the fair market value of tokenized real-world assets in real estate transactions. Overall, these regulations are designed to prevent the use of digital assets to hide taxable income and improve tax compliance in the crypto space.
Decentralized exchanges and self-custody wallets are not subject to the new reporting rules at this time. The IRS is still reviewing industry comments and needs more time to study decentralized networks. The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers, commonly known as decentralized or non-custodial brokers, will be addressed in a different set of final regulations in the future. Industry advocacy groups like The Blockchain Association have welcomed the IRS’s decision to further study DeFi, indicating that the industry’s collective voice continues to have a positive impact in Washington.
The IRS Commissioner, Danny Werfel, emphasized that these regulations are essential for detecting noncompliance in the high-risk space of digital assets. He stated that third-party reporting improves compliance and will provide taxpayers with the necessary information to simplify their tax reporting process. This move has been seen as a significant policy win for DeFi, as the regulations only apply to custodial brokers and not non-custodial DeFi front-ends. Jake Chervinsky, a well-known crypto lawyer, called this decision unexpected but a huge victory for DeFi, as it will not require non-custodial DeFi front-ends to conduct KYC on users as initially proposed in the infrastructure bill’s tax provisions.
Overall, the new regulations introduced by the IRS aim to enhance tax compliance in the crypto space and prevent tax evasion. By requiring custodial brokers to report their users’ transactions, the IRS hopes to provide taxpayers with the necessary information to simplify their tax reporting process. This move has been well-received by industry advocacy groups and experts in the crypto space, who see it as a positive step forward in regulating the industry while also allowing room for further study of decentralized networks such as DeFi.
