The United States Internal Revenue Service (IRS) is contemplating a proposal that could have far-reaching implications for the cryptocurrency industry. Investors need to pay attention because it has the potential to significantly impact how individuals, both inside and outside the US, can engage with digital assets.
Under Section 6045 of the tax code, the IRS is proposing an initiative to establish new tax rules for cryptocurrency providers. The agency aims to broaden the definition of “brokers” to include nearly all crypto-service providers, such as decentralized exchanges (DEXs) and wallet providers. These providers would be required to collect personal information from users starting in 2025 and submit a Form 1099-DA to the IRS in 2026, similar to the 1099-MISC.
The IRS’s move to redefine “broker” is not merely a regulatory adjustment but a fundamental shift that could reshape the entire US cryptocurrency landscape. By expanding the definition to include a wide range of cryptocurrency service providers, the IRS is significantly extending its jurisdiction. This expansion means that more entities involved in digital asset transactions, from wallet providers to small-scale developers, may have to report user information and transaction details to the government.
Example of a Form 1099-MISC. Source: Glassnode
For users and investors in the cryptocurrency space, this change could result in increased reporting and compliance obligations, which would limit the anonymity and flexibility currently enjoyed by users. Service providers would need to adopt new systems and procedures for compliance, including collecting personal information from users. While the IRS is technically targeting American users, service providers would have no way of determining nationalities before collecting user data.
This move represents a significant step towards aligning digital assets with traditional financial systems in terms of regulatory oversight and transparency. It is crucial for the average American to understand the implications of this proposal as it represents a significant turning point in how regulators perceive and manage digital assets.
The industry has responded to these regulatory changes with concern and active engagement. Major players, including Coinbase, have expressed apprehensions about the intrusion into personal privacy. Coinbase’s chief legal counsel, Paul Grewal, noted that the change would set a dangerous precedent for surveillance of consumers’ everyday financial activities by requiring the reporting of nearly every digital asset transaction, even the purchase of a cup of coffee.
The broader industry shares similar concerns about regulations stifling the growth of digital assets. One primary issue is applying conventional regulatory frameworks to decentralized systems, ensuring investor privacy protection while fostering an environment that supports innovation and maintains market stability.
This change would have significant implications for individual investors and developers in the cryptocurrency realm. Clearer regulatory guidelines could increase market confidence and investment activity for investors. However, excessively strict regulations risk hindering innovation and reducing the appeal of cryptocurrencies as an alternative to traditional financial systems. For developers, especially those in the DeFi sector, these regulatory shifts present both compliance challenges and opportunities to influence the development of rules that recognize the unique capabilities of blockchain technology.
Navigating these regulatory proposals requires a balanced approach. The cryptocurrency industry must actively engage with regulators to ensure the creation of fair, practical, and innovation-friendly regulations. Balancing regulatory oversight with preserving the core values of the ecosystem is crucial for the future of digital finance. The industry’s ability to adapt to these regulatory changes while retaining its innovative essence is pivotal.
The need for regulatory adaptability and industry evolution is more evident than ever. The cryptocurrency sector is encouraged to evolve its practices to meet emerging regulatory standards while preserving its innovative and decentralized nature. At the same time, regulators face the challenge of understanding the unique aspects of digital assets and decentralized systems to develop effective, sensible, and forward-thinking regulations.
The cryptocurrency industry’s involvement in lobbying and political contributions has become increasingly significant. In 2022, the industry’s lobbying efforts and political contributions have surged, reflecting its growing interest in shaping regulatory frameworks. This political engagement demonstrates the industry’s commitment to influencing policy decisions that will impact its future. It also emphasizes the need for a regulatory environment that understands and accommodates the unique characteristics of digital assets and blockchain technology.
Expanding the definition of “broker” would hinder innovation for the industry, especially in the US. The cryptocurrency community’s resilient response, advocating for fair and supportive regulatory measures, highlights the delicate balance between effective regulation and fostering technological progress.
As the industry actively participates in shaping these regulations, its involvement is crucial to ensure the US cryptocurrency sector continues to thrive in a competitive global landscape. Balancing regulatory compliance with innovation and growth is key.
Tomer Warschauer Nuni is the chief marketing and business development officer at Pink Moon Studios. With over two decades of experience in tech, gaming, and blockchain, Tomer is an adept early-stage investor and startup advisor for projects including ChainGPT and GT-Protocol. He holds degrees in governance and communication from Reichman University.
This article is for general information purposes only and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.