Key Takeaways
- The IRS has delayed the implementation of full crypto tax reporting rules for brokers until 2026, meaning that brokers will only be required to report gross proceeds on cryptocurrency transactions in 2025.
- This phased approach aims to ease the transition for the crypto industry and the IRS as they navigate the complexities of crypto taxation.
- The initial focus on reporting gross proceeds allows for a more gradual implementation. At the same time, the IRS continues to develop regulations for reporting more detailed information, such as the cost basis of crypto assets.
The United States Internal Revenue Service (IRS) has delayed the new cryptocurrency tax reporting requirements until 2026. This article will discuss what this delay means and what you should do.
Why Should You Care?
Just a few weeks ago, the IRS propagated new regulations redefining what a broker is and the rules regarding the method of accounting. These regulations were slated to start on January 1st, 2025.
After a massive pushback from the industry mounting legal action against the IRS and basic logic, they pushed back implementation until January of 2026, meaning that the first reporting will not happen until 2027.
Brokers were saying that there was no way that their software systems could handle the transition that quickly. The broker reporting requirements will not affect you as a crypto trader much other than knowing that your information, including potential KYC, will be sent to the IRS by non-custodial brokers.
Additionally, the IRS is pushing back the method of accounting until 2026. This is a big deal for many crypto investors as accounting methods, such as HIFO, LIFO, and FIFO, can have an enormous impact on how gains and losses are reported. Having the flexibility to choose one of these methods is a significant strategy investors do not want to lose.
Tax Reporting For Non-Custodial Front-End Providers
On December 27th, 2024, the Department of Treasury released TD 10021, which affects reporting requirements for what are essentially non-custodial front-end providers.
This regulation just changes the definition of who a broker is. Previously, only custodial brokers were subject to the new reporting requirements passed earlier this year. Custodial brokers include companies like Coinbase and Gemini. They are required to file the latest and, as of today, still in draft format 1099-DA, starting for transactions in 2025.
Note that a custodial broker is a platform that holds custody of your digital assets. A non-custodial broker, on the other hand, does not have access to your assets. The new expanded definition includes what they call “digital asset middlemen” who are non-custodial but effectuate transactions. Examples of non-custodial brokers would be Uniswap and Sushi Swap.
The key takeaway is that your KYC information will be accessible to the IRS. This could be concerning for many investors as this will cause many compliance issues, especially for developers, because DeFi and centralized finance (CeFi) work very differently, and what this brand new rule would do would essentially ban DeFi. After all, it would make it impossible for developers and DeFi platformers to comply.
However, there won’t be an immediate impact, as this change will not take effect until January 1st, 2027. Additionally, the new regulations raise several unresolved issues, and with the new administration taking office, this likely won’t be the last we hear about it.
Crypto Staking
According to the IRS, crypto staking constitutes a taxable event.
The IRS’ position is that staked tokens represent passive income that is taxable as of the fair market value of the date it was received. This technically aligns with current accounting principles, as staking rewards indeed represent value received.
Standard accounting procedures typically require reporting the receipts of assets at the time received. It is an interesting case as it is one of the few that will push the IRS to make clearer pronouncements on handling different transactions with digital properties.
Final Thoughts
It is important to note that this has nothing to do with your tax liability or reporting requirements for 2024 or 2025, so please move forward with filing your taxes, including your crypto, by April 15th, 2025.
