IRS unveils new crypto tax rules: Are they a good thing?

While industry advocates have welcomed the finalized crypto tax measures after years of wrangling, messy deliberations about non-custodial providers still lie ahead.

It’s been a long time consuming, but the Internal Revenue Service and the Treasury Department have finally agreed upon new crypto tax reporting rules for investors.

At first, you may assume that these new guidelines would send shivers down the spine of exchanges and customers alike.

But given there’s long been exasperation over a lack of clarity in the space, the policy — which attracted a whopping 44,000 comments during a consultation — has been pretty well-received.

Why, you may ask? Because there are now clearer rules of the road to follow… and there are arguably benefits for everyone concerned.

Trading platforms will now be tasked with reporting the gains and losses of their customers, with measures gradually coming into force over the next three years.

It’s hoped this will help taxpayers — who have long had the responsibility of reporting the profits made from crypto investments — to file accurate returns with less fuss.

Meanwhile, it could also deliver a chunky windfall to the IRS, with some estimates suggesting it could boost tax income by $28 billion in the space of a decade.

Are there any losers? Yes… those who have been failing to declare their gains for the past few years on the erroneous assumption their crypto trades can’t be traced.

The IRS said it had sought to “close the tax gap related to digital assets” while ensuring the toughened rules could be implemented practically by the crypto sector.

“These regulations are an important part of the larger effort on high-income individual tax compliance. We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets.”

IRS Commissioner Danny Werfel

Officials went on to make clear that there is more work to be done here. A glaring omission from these new guidelines are decentralized brokers — in other words, platforms that don’t end up taking custody of coins on behalf of users.

The IRS and the Treasury went on to admit that they need “more time to consider the nuances” of such transactions — but in any case, most taxpayers use centralized brokers anyway.

‘A game-changer’

In a statement sent to crypto.news, TaxBit’s VP of tax, Erin Fennimore, said the newly inked rules “mark an important step for digital assets in the U.S.”

Arguing they bring “much-needed clarity and legitimacy to a rapidly growing financial market,” she added:

“[This] is a game-changer for the industry. This newfound regulatory certainty empowers enterprises and traditional financial institutions to navigate the digital asset sector with confidence.”

Erin Fennimore

She went on to argue that this could make digital assets “a more accessible investment option” for individuals and enterprises alike — building on the momentum of exchange-traded funds based on Bitcoin’s spot price, with rumors that Ether could follow suit soon.

“These updates offer enterprises, specifically custodial exchanges, the guidance needed for proper compliance, further solidifying crypto’s position within the broader financial ecosystem.”

Erin Fennimore

She went on to call for businesses in the crypto space to “streamline compliance internally” — ensuring that reports aren’t doubled up and cut the chance that customers will end up falling afoul of the taxman.

A messy fight

Coin Center also welcomed the finalized reporting rules, but argued that a hell of a lot of time has been wasted in getting to this point.

A particular sticking point concerned who should be defined as a “broker” in the crypto space, with the nonprofit arguing for more than six years that it should only apply to centralized exchanges like Coinbase and Kraken.

That has finally happened now — but the IRS and the Treasury might have foregone a lot of tax revenue as they wrangled with Congress.

“By now we could have verifiable records of taxpayer gains from centralized exchanges for half a decade. We don’t.”

Coin Center

The group went on to order that, if the definition of a broker had remained “vague and unreasonable,” everyone from miners and validators to software developers would have ended up in a position where they might have had to surveil fellow crypto users and report private transactions — or face criminal punishment. Warning this could have amounted to a constitutional violation, they added:

“Had it been adopted, the broker definition would have made the US non-competitive in the field of open blockchain technologies.”

Coin Center

Unfortunately, the question of what should happen with non-custodial entities remains unanswered. What lies ahead could get messy.