IRS Finalizes Crypto Reporting Rules, Prompting Pushback (2)

The Biden administration finalized reporting requirements for certain cryptocurrency brokers Friday, prompting pushback from an industry hoping for more favorable treatment when President-elect Donald Trump takes office in January.

The regulations (RIN 1545-BR39, TD 10021) provide clarity on how decentralized cryptocurrency exchanges should report tax information.

Decentralized exchanges, known as DeFi, tend to be automated platforms not backed by a company with a team of people to identify and report the transactions. The platforms argued they shouldn’t be subject to the broker reporting requirements. Treasury and IRS still included them as brokers but delayed finalizing this portion of the rules when they released rules for centralized exchanges in July 2024.

Trump and some GOP allies in Congress have promised to be friendlier to the industry.

“We’re prepared to take aggressive action to fight back,” Blockchain Association CEO Kristin Smith said in a statement. “We also look forward to working with the new pro-crypto Congress and Administration to roll back this and other anti-innovation rules.”

The association, a trade group representing the crypto industry, called the final rules “disappointing” and a “final attempt to send the American crypto industry offshore.”

Defining DeFi Brokers

The final rules include a lengthy comparison between decentralized exchanges and other securities brokers to explain why the exchanges meet the definition of broker.

Trading front-end service providers, which provide crypto users with a menu of services to enable trades, are subject to the DeFi reporting rules. The company that runs the trading front-end service must report the transactions on the platform.

“Notwithstanding differences in the technology used and the details of the mechanisms by which a customer’s order is carried out, these services are similar to those provided to a customer by a traditional securities broker that does not hold or custody a customer’s assets,” the final rules read.

Treasury and IRS define the reporting company as one that has the ability to update or amend the terms of which the services are provided, can collect fees from the transaction flow, and can track or receive confirmation that an order was executed, said Miles Fuller, senior director of government solutions at TaxBit, in a LinkedIn post.

The final rules have exceptions for validation services and certain wallet software providers.

Treasury and the IRS also said internet service providers, internet browsers, or computer or smartphone manufacturers are not intended to be included in the definition of DeFi brokers, agreeing with some of the comments on the proposed rules.

The final rules weren’t as broad as expected, said Jonathan Cutler, a global information reporting senior manager at Deloitte Washington National Tax. He said the IRS limited the definition of broker “to a surprisingly narrow set of participants” compared to the proposed definition. The agency removed the term “facilitative service,” which incorporated a more comprehensive set of players that would have included direct and indirect providers.

Looking Ahead

The Trump administration may try to walk back some of the reporting rules.

For example, the final DeFi reporting rule is vulnerable to the Congressional Review Act, which allows Congress to repeal final rules from federal agencies within a certain time frame. The first Trump administration repealed 16 Obama-era rules.

“Basically, the test is whether or not Congress feels the regulation aligns with the legislation that was passed by Congress,” Fuller said in an interview, noting that the upcoming administration change will overlap the 60-day review period.

But Republicans have other priorities in 2025, such as working on the next tax package to extend the GOP’s 2017 tax law. Repealing the crypto rules could fall through the cracks, Cutler said.

“Potentially the Congress won’t have time for it, because they’ll be doing so many other things,” Cutler said.

Some tax professionals specializing in crypto are also skeptical of the IRS’s ability to enforce the reporting rules. For example, the agency might not even know a certain DeFi platform exists, making audits difficult, said Jessalyn Dean, vice president of tax information reporting at crypto tax company Ledgible.

The reporting requirements for DeFi platforms apply to sales of digital assets occurring on or after Jan. 1, 2027. That’s two years after reporting starts for centeralized exchanges.

Providing Relief

The IRS also released a noticeFriday providing transition relief from penalties for certain brokers who fail to report sales of digital assets.

The penalty relief is available to brokers who provide trading front-end services, information returns required to be filed, and payee statements required to be furnished in 2028 for digital assets sold in 2027. The relief is available as long as the broker makes a good-faith effort to file the appropriate information return and an accurate associated payee statement.

The notice also provides transition relief for DeFi brokers from the liability of paying backup withholding tax—as well as penalties for failing to pay that tax—on any sales in 2027 and certain sales in 2028.

The rules relate to crypto reporting requirements that were part of the 2021 federal infrastructure law, which intended to capture taxes owed from unreported transactions and make it easier for crypto owners to file returns.

The August 2023 proposed regulations for all crypto brokers received 44,000 comments, many of which focused on issues in the rules for decentralized exchanges.