The Internal Revenue Service (IRS) has posted final regulations regarding information reporting by brokers who affect transactions of digital assets. These regulations become effective on February 28, 2025.
Last week, a bipartisan group of US House of Representatives members forwarded a letter to the US Secretary of the Treasury requesting the new rules not be issued as they fall short in addressing various issues.
The final regulations require certain digital asset brokers to file information returns and payee statements reporting gross proceeds on dispositions of digital assets effected for customers in a sale or exchange of digital assets. Treasury and the IRS are using similarities to the traditional securities industry in applying the rules.
The new regulations followed rulemaking in 2023 as the agency sought to establish requirements for reporting digital asset trading.
Part of the challenge of creating new rules is the emergence of DeFi or decentralized finance, including non-custodial wallets, where there may not be an intermediary.
The IRS notes that future proposed rulemaking is in the works to address “unhosted wallets.”
“Trading front-end service providers exercise a degree of control over their customer’s digital assets once the transaction has been authorized or signed in the customer’s unhosted wallet to withhold their fees from the customer’s digital assets and can similarly satisfy their obligation to backup withhold from either the digital assets disposed by the customer in the transaction or the digital assets received in the transaction should the customer fail to provide its name, address, and TIN ]taxpayer identification number]. The Treasury Department and the IRS are aware, however, that not all arrangements between trading front-end service providers and their customers currently provide for backup withholding. The Treasury Department and the IRS intend to publish a notice of proposed rulemaking under § 31.3406(h)-2(b) with proposed regulations that would provide trading front-end service providers with greater flexibility to satisfy their backup withholding obligations with respect to these transactions.”
So, as it stands now:
“… the Treasury Department and the IRS have concluded that trading front-end services that enable customers to interact with DeFi trading applications should be treated as effectuating services for purposes of the digital asset middleman rule.”
The Treasury and IRS do not believe it is unreasonable to require wallet services to know the identity of their users participating in digital asset transactions. At the same time, the document defends the Treasury and the IRS as not attempting to discourage digital asset adoption and DeFi technology. It is “not necessary to determine at this time whether and to what extent DeFi trading applications are truly decentralized.”
We are still sorting through the rules. Developing…
You may download the PDF here.