The IRS published its final definition of a broker for crypto tax reporting purposes Friday.
Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De. It is the last Friday of 2024, so naturally there's a 115-page Internal Revenue Service final rule to dig through. The Infrastructure Investment and Jobs Act mandated the IRS better define the word "broker" as it relates to digital asset services. The IRS published a document which creates definitions and rules around these activities.
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A broker by any other name? |
The IRS published a final rule which seems to mandate a large chunk of crypto entities — including decentralized finance entities — to conduct know-your-customer data on users.
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This final rule follows months of back-and-forth between the IRS and the general public, after the IRS' initial proposal received some amount of pushback. Still, the final rule published Friday imposes a number of obligations on "digital assets middlemen," which refers to "any person who is responsible for providing an effectuating service" — in other words, any service that provides a trading front-end or would otherwise have an operator who has some control over the service and can know how the transactions are being facilitated. |
The IRS' proposal appears to require that any entity that might facilitate a crypto transaction collect information about the transaction's participants if they meet the definition of a "digital asset middleman."
"A person providing trading front-end services ordinarily would know or be in a position to know the nature of the transaction potentially giving rise to gross proceeds from a sale of digital assets if that person maintains control or sufficient influence over the trading front-end services to have the ability to determine whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds," the rule said.
This includes any person who has the ability to amend or change "the terms under which the services are provided," or can add instructions soliciting information from the transaction processing.
Less clear is how exactly developers who aren't themselves operating any services might be affected, Coin Center said in a blog post.
"Today’s final rule could still obligate mere developers and infrastructure providers to surveil and report on the users of their tools," the blog post said.
These obligations may be impossible to comply with for certain developers, Coin Center suggested in the post.
"So if you add immutable encryption-based restrictions to your software that protect the privacy of your software users and also prevent you from being in a position to know their transactions, you will still be obligated as a broker to learn the identity of the users of your software and report the details of their trades," the blog post said. "This is, in effect, a prohibition on building software tools that empower and protect users."
Miles Fuller of TaxBit said on LinkedIn that validators and wallet service providers are carved out, unless the wallet service providers are also providing effectuating services.
I imagine this won't be the last we hear about this rule in the months ahead. |
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The central bank of Latvia, Latvijas Banka, invites crypto-asset service providers seeking to acquire the EU MiCA license to participate in free pre-licensing consultations. Latvijas Banka has developed both licensing and pre-licensing processes to provide the best possible support for innovators. The pre-licensing process offers individual consultations with Latvijas Banka experts, ensuring guidance on the viability of applications, regulatory compliance, and document readiness. |
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If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Bluesky @nikhileshde.bsky.social. You can also join the group conversation on Telegram. See y’all next week! |
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