The Biden administration has taken a significant step towards regulating tax evasion within cryptocurrency markets, marking a notable shift in approach despite ongoing lobbying efforts by industry giants like Coinbase. The Treasury Department finalized a rule requiring many cryptocurrency platforms, particularly custodial ones such as Coinbase and Binance, to report user transaction information to the IRS. This move aims to combat tax evasion by ensuring that investors’ crypto activities are transparent to tax authorities, thus dissuading non-compliance.
The new regulations promise benefits for law-abiding investors, simplifying tax filing with standardized 1099 forms akin to those provided by traditional financial institutions. Previously, without clear IRS guidelines, crypto investors often relied on costly and unreliable services to estimate their tax liabilities.
Aviva Aron-Dine, Treasury’s acting assistant secretary for tax policy, emphasized that these regulations will enhance tax compliance among digital asset investors while curbing tax evasion, particularly among wealthier individuals.
Despite the comprehensive approach, the finalized rules include exemptions advocated by crypto lobbyists to mitigate regulatory burdens. Notably, decentralized finance (DeFi) platforms, which facilitate direct trading without custody of assets, are currently excluded but will face separate regulations expected later this year.
Lawrence Zlatkin, Coinbase’s vice president of tax, acknowledged the IRS for moderating the final rule but expressed concerns over certain aspects, such as the inclusion of small gains and losses in reporting requirements.
Cryptocurrency’s rise since Bitcoin’s inception in 2009 has posed challenges to tax authorities worldwide, given its decentralized nature and initial lack of systematic reporting. This environment has attracted individuals seeking to evade taxes, exemplified by cases like Roger Ver, an early crypto investor arrested for allegedly evading substantial tax liabilities.
The Congressional Budget Office estimates that these new rules could generate $28 billion in federal revenues over a decade by reducing noncompliance in crypto markets. Although originally slated for implementation in tax year 2023, logistical delays pushed the enforcement to commence in 2026 for reporting sales proceeds, followed by cost basis reporting in 2027.
In defining stablecoins, which are digital assets pegged to fiat currencies, Treasury crafted criteria requiring adherence to a stable value and acceptance in payments, with minimal deviations from their intended value.
Overall, the Biden administration’s regulatory framework aims to encompass the diverse spectrum of crypto assets, from volatile cryptocurrencies like Bitcoin to stablecoins and non-fungible tokens (NFTs), while balancing innovation with regulatory oversight in the evolving digital financial landscape. These measures reflect a pivotal moment in cryptocurrency regulation, shaping its future role in global finance.