Crypto investors only experience rising trends in brief parts of each cycle, and the IRS is closely following these developments. Investors who have suffered losses exceeding 80% over several months are slowly seeing their wallets recover. U.S. institutions have been slow to step up with necessary crypto regulations, but they appear agile and quick when it comes to taxation.
Crypto Currencies and Taxation
Almost nowhere in the world has a complete definition of cryptocurrencies been established yet. Are they commodities, securities, money, or something else entirely? Should cryptocurrencies have a unique definition of their own? While basic definitions and regulations are still lacking, states are much quicker to act when it comes to taxation.
The U.S. Internal Revenue Service (IRS) recently published a new draft form. This draft was prepared to mandate brokers and exchanges to report certain crypto asset sales, and it is now requesting companies to comply. The IRS’s latest move provides insights into how brokers might be categorized.
In the Form 1099-DA draft, the IRS lists types of brokers:
- Kiosk Operators (ATMs etc.)
- Crypto Asset Payment Processors
- Providers of Centralized and Decentralized Wallet Services
- Others
U.S. and Crypto Taxation
The recently proposed draft is actually part of the Infrastructure Investment and Jobs Act, accepted in 2021, which led to headlines about impending crypto taxes in the U.S. and was later postponed. Ji Kim, chief legal and policy officer at the Crypto Council for Innovation, mentioned it was unfortunate that decentralized wallet providers (e.g., MetaMask) are listed as brokers.
“This shows that a wallet provider as a software technology provider can have knowledge about the nature of the transactions processed or the identities of the transaction parties.”
The latest assessment by Gordon Law Group mentioned that companies might soon share information about their customers’ crypto transactions. This includes decentralized wallets, meaning user transactions will be reported regardless of where they use crypto. This brings a contradiction such as the KYC requirement in the DeFi space.
“Although the crypto community is likely to oppose decentralized exchanges (DEXs) being required to report to the IRS, the IRS will not be flexible. DEXs are currently not collecting tax information about their customers, but the IRS believes they are in a position to know their users’ identities and should implement Know Your Customer (KYC) requirements.”
