Significant regulatory movements are underway in the digital asset industry, both in the United States and globally, all aimed at enhancing tax transparency. This global push is driven by several factors, including concerns over tax evasion and avoidance, and the broader goal of ensuring a fair and transparent international tax system.
The primary mechanism for achieving tax transparency is the exchange of information between businesses and local tax authorities. Outside the US, the Organisation for Economic Co-operation and Development (OECD) and the G20 have led initiatives to promote global tax transparency. This article outlines the key points of the proposed US digital asset broker regulations and other major global efforts, highlighting important commonalities and timelines.
Proposed US Digital Asset Broker Regulations
The US Department of the Treasury has released proposed regulations that clarify the definitions, requirements, and implementation timelines for digital asset broker tax information reporting, as outlined in the Infrastructure Investment and Jobs Act (IIJA) passed by Congress in 2021.
IRS Commissioner Danny Werfel stated, “These proposed regulations are intended to help eliminate confusion involving digital assets and provide clarity for taxpayers, tax professionals, and others.” This move represents a significant step in US digital asset oversight and is expected to have a major impact on the industry. The regulations are also anticipated to increase market transparency and help combat money laundering and other financial crimes.
Key Aspects of the Proposal
It is important to note that these regulations are not yet final. The IRS is accepting comments on the proposed rules and held a virtual public hearing on November 13. All submitted comments are public and can be viewed on the Federal Register summary website.
The following sections summarize the key areas that impact the digital asset community.
Definition of a Digital Asset Broker
The proposed regulations define a "digital asset broker" as any person who provides services facilitating the sale or exchange of digital assets. This includes centralized exchange operators, digital asset payment processors, and certain decentralized protocols that exert sufficient control or influence to make changes to the protocol.
The rules focus on three main categories of businesses:
- Operators of centralized exchanges that facilitate digital asset transfers on behalf of users.
- Digital asset payment processors.
- Certain decentralized protocols that meet specific criteria and are usable by US persons.
The third category requires the most nuanced analysis. At a high level, a business falls into this category if it meets two key factors:
- It provides a facilitative service.
- Based on the nature of its service, it knows or can know: (1) the identity of the party conducting the sale, and (2) the nature of the transaction that could produce sale proceeds.
The regulations define a facilitative service as one that enables the sale or exchange of a digital asset, whether through an autonomous protocol, access to a trading platform, an automated market maker system, or any order-matching service. This approach reflects the Treasury's understanding of how digital asset trading services differ from traditional financial brokerage services.
Regarding the second factor, the regulations explain that a person is considered to "know or be able to know" if they can set or change the terms of the service provided. The focus is on whether an entity has sufficient control over an autonomous protocol to modify, update, or otherwise influence its operation.
If a DeFi protocol can be managed, controlled, or rewritten in any way by a centralized group, it may be deemed sufficiently centralized to be considered a digital asset broker. Conversely, a protocol that operates truly autonomously, without any oversight, intervention, or influence from a specific group, would not be considered a broker and would not be subject to the reporting requirements.
The proposed regulations also clarify who is considered out of scope, including miners, stakers, and wallet software providers.
Definition of a Digital Asset
A digital asset is defined as any digital representation of value recorded on a cryptographically secured distributed ledger, even if not every transaction is individually recorded. The proposed regulations clarify that stablecoins and non-fungible tokens (NFTs) are within scope, which has been a major focus area in the comments received by the IRS.
Form 1099 Reporting
A broker's core functions involve customer onboarding procedures, cost-basis tracking, and ultimately, Form 1099-B reporting. Historically, Form 1099-B has been used in traditional finance to report required information. Although not explicitly mentioned in the proposed regulations, the IRS has publicly commented on creating a new form (1099-DA) specifically for digital assets.
Similar to traditional financial asset reporting, digital asset reporting will require brokers to provide the following information for each transaction:
- Name, address, and Taxpayer Identification Number (TIN) of the customer.
- Digital asset details (name, type, number of units).
- Date and time (in UTC).
- Gross proceeds from the sale and the adjusted cost basis.
- Transaction ID or hash.
- Digital asset addresses involved.
- The form of consideration received.
For assets transferred to a broker and subsequently disposed of, the following additional information is required:
- The date and time of the inbound transfer.
- The transaction ID or hash of the inbound transfer.
- The digital asset address from which the assets were transferred (or multiple addresses if applicable).
- The number of units the customer transferred as part of the inbound transaction.
Customer Tax Requirements
To comply effectively with 1099 reporting, digital asset brokers need to know who their customers are for tax purposes. This means they must be able to identify and collect the following information for reportable accounts:
- Identify US and non-US accounts.
- Collect name, address, and a certified US Tax Identification Number (TIN).
Brokers in the traditional finance industry are already obligated to collect certified TINs. Digital asset brokers will now shoulder the same obligation, a requirement that will significantly impact digital asset customers. Brokers will need to collect a certified TIN, typically by having customers complete a Form W-9 or a W-9 substitute. The information collected on the W-9 is used to prepare and file both Form 1099-B and the new Form 1099-DA.
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Global Trends in Tax Transparency
The United States is not the only jurisdiction issuing regulations related to digital asset tax transparency. As digital asset use cases grow globally, numerous proposals and frameworks targeting businesses in the crypto asset and e-money space have emerged. While the goal of these frameworks is centered on tax transparency, understanding their differences, timelines, and implications for your business is crucial.
Crypto-Asset Reporting Framework (CARF)
On October 10, 2022, the OECD, which has 38 member countries, released the final guidance for the Crypto-Asset Reporting Framework (CARF). The framework was created in response to "the rapid development and growth of the crypto-asset market..."
On November 10, approximately 47 countries issued a statement expressing their intention to "swiftly transpose CARF into domestic law" and plan to begin the active exchange of information by 2027. The expected effective date for the remaining 38 OECD members is still unknown, but the organization intends to work toward global adoption and implementation of the framework.
DAC8
Following CARF, the European Commission released the eighth amendment to the Directive on Administrative Cooperation (DAC8) on December 8, 2022. The adopted directive came into force on November 13, 2023. EU member states must transpose the new rules into local law by December 31, 2025, with the first reporting obligations starting from January 1, 2026.
DAC8 extends the scope of the existing DAC rules to include crypto-asset service providers facilitating transactions and transfers of crypto-assets and e-money. Its provisions significantly overlap with CARF, meaning crypto service providers will be obligated to report specific information on transactions involving EU residents.
Markets in Crypto-Assets (MiCA) Regulation
On June 30, 2022, the European Parliament and Council reached a provisional agreement on the Markets in Crypto-Assets (MiCA) Regulation. MiCA's objective is to enhance protections for digital asset investors by requiring common definitions and rules across the EU. The MiCA requirements are set to take effect on December 30, 2024.
Consequently, crypto-asset service providers operating in the EU will be required to have a registered office within the trade bloc.
CESOP
The Central Electronic System of Payment information (CESOP) is a new EU system designed to proactively combat Value-Added Tax (VAT) fraud related to cross-border payments. By the first quarter of 2024, payment service providers in the EU are required to report cross-border payments on a quarterly basis. This initiative aims to improve transparency and compliance for cross-border transactions, particularly those involving electronic money institutions.
- Cryptocurrency exchanges should be aware of CESOP as it may impact them when they facilitate the buying and selling of crypto between parties in different EU member states.
- CESOP reporting is triggered when a buyer (the payer) is located in the EU and makes a cross-border payment to a seller (the payee) located either inside or outside the EU.
- CESOP includes various reporting limitations, primarily requiring reporting on payees who receive 25 or more cross-border payments.
Frequently Asked Questions
What is the main goal of the proposed US broker regulations?
The primary goal is to enhance tax transparency in the digital asset space. The regulations aim to clarify reporting requirements for brokers, ensuring that digital asset transactions are reported to the IRS similarly to traditional financial assets, thereby reducing tax evasion and increasing market clarity.
How do the US proposals define a 'digital asset broker'?
The definition is broad and includes any entity that provides services facilitating digital asset sales. This encompasses centralized exchanges, payment processors, and even some decentralized protocols if they maintain sufficient control or influence over the protocol's operation to make changes.
What is the global significance of frameworks like CARF and DAC8?
CARF and DAC8 represent a coordinated international effort to combat tax evasion through digital assets. They establish a standard for the automatic exchange of tax-related information on crypto transactions between countries, creating a global net of transparency that makes it difficult to hide taxable activity across borders.
When will these new global regulations take effect?
Timelines vary. The US proposed regulations are not yet final. In the EU, MiCA compliance begins in late 2024, DAC8 reporting starts in 2026, and many countries plan to implement CARF and begin information exchange by 2027. Businesses must monitor local transposition deadlines.
Do these regulations apply to NFT transactions?
According to the current US proposals, yes, NFTs are explicitly included within the definition of a digital asset and would be subject to the same broker reporting requirements if sold through a qualifying platform.
How can a digital asset business prepare for these changes?
Businesses should begin reviewing their operations to determine if they meet the broker definition. They must also start developing robust systems for customer identification (KYC), transaction tracking, cost-basis calculation, and ultimately, the generation of the new tax forms. 👉 Get advanced compliance methods