The Internal Revenue Service (IRS) released a revised version of its “broker rule” guidance on Friday, offering a glimmer of hope for the cryptocurrency industry. The initial proposal, unveiled in August 2023, caused alarm with its broad definition of a “broker,” potentially encompassing decentralized exchanges (DEXs) and non-custodial wallet providers.
Industry concerns centered around the feasibility and privacy implications of applying traditional brokerage reporting requirements to decentralized protocols with no central authority. Coin Center, a crypto advocacy group, applauded the IRS for seemingly acknowledging this distinction. “They agree that custodial brokers are brokers,” said Neeraj Agrawal, Coin Center’s Chief Communications Officer. “The question is, can a self-custodial application like a DEX, which is essentially code with no central figure, be considered a broker too?”
The revised guidance clarifies that centralized exchanges like Coinbase and Kraken will be subject to the new rules, which partially take effect in 2025. However, the fate of decentralized protocols remains undecided. The IRS filing acknowledges the need for “additional consideration of issues involving non-custodial industry participants.”
This shift seems a direct response to industry pushback. Coin Center, along with the Blockchain Association, had raised concerns about the initial proposal’s potential to stifle innovation and impose immense compliance burdens. The proposed regulations, which build on the Infrastructure Investment and Jobs Act’s crypto tax reporting requirements, could have vastly expanded the scope of 1099 reporting, encompassing a vast array of digital assets beyond traditional cryptocurrencies.
The Blockchain Association estimated the initial proposal could generate a staggering 8 billion additional 1099-DA forms, translating to a compliance cost of $254 billion. This broad reach stemmed from including nearly any blockchain-based asset transaction, from NFTs to stablecoins, under the 1099 reporting umbrella.
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Industry experts like Neeraj Agrawal and Bill Hughes of Consensys believe the revised guidance reflects the IRS taking these concerns into account. The guidance “does NOT finalize rules pertaining to unhosted wallets and related non-custodial software offerings,” clarifies Hughes, indicating that the status of DEXs and similar platforms remains under review.
While the final picture remains unclear, this revision provides a temporary reprieve for decentralized platforms. The saga highlights the ongoing regulatory dance between the crypto industry and the government as they grapple with integrating this novel technology into existing tax frameworks.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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