IRS moves to classify crypto exchange wallets as brokers for tax reporting

The IRS ( Internal Revenue Service) is now considering designing a new tax form requiring transactions on certain crypto assets to be recorded. The Digital Asset Proceeds from Broker Transactions draft implies that the responsible taxpayers should fill out Form 1099-DA, collecting the account holder’s ID and detailed transaction data from crypto brokers. As per the Head of crypto accounts – Shehan Chandrasekera – appointing a trader data collecting system could be a game changer in the crypto industry, and it will bring the end of taxation privacy.

IRS targets crypto transactions

Brokers (custody organizations, certain decentralized finance exchanges, and wallets) will now have to provide form 1099-DA in every transaction they are involved in. From 1 January 2025, brokers will be supposed to submit the info to the IRS and you (just like stock brokers).

The Form covers basic info like date, photo, sale, sale proceeds, and cost basis. The article provides the tax developer with needed and beneficial information to finalize the crypto tax filing process. As the highest data level, the federal administration cannot collect and report the following additional points (especially wallet addresses) at a large scale, which could cause serious privacy and security issues.

IRS adds “unhosted wallet provider” to its form, attempting to include unhosted wallets under the “broker” definition, although this move made opponents skeptical.

Privacy vs. tax compliance clash

Gordon Law LLC, a firm that concentrates on tax and crypto law, will examine Form 1099-DA to understand what this type of entity might include in what the IRS defines as brokerage. According to the firm, custodial and non-custodial exchanges, wallets, wherein people can buy and sell Bitcoin, Bitcoin ATMs, and other physical counters, will be classified as brokers.

Gordon Law believes that though the crypto community will oppose the new form of Broker, which addresses decentralized exchanges (DEXes) as brokers, the IRS is less likely to be so flexible.

DEX’s present structure does not allow it to tag any tax information with its patrons, and this can be another case in which the IRS can argue that DEXs were to know of their customers’ identities. Hence, an order can be passed, forcing DEXs to check their customers’ identities using the KYC process.

The IRS notice does not include mining equipment, node operators, hardware e-wallets, software developers, and programmers among the brokers, as Gordon Law claims.