In recent years, digital assets have caused a wave of excitement in the financial markets. From cryptocurrencies like Bitcoin and Ethereum to stablecoins like USDT, and even NFTs (non-fungible tokens), these new assets have not only attracted a large number of investors, but also sparked global technological innovation and regulatory discussions.
However, the rapid rise of digital assets has also brought about many problems. Due to their anonymity and cross-border mobility, tax authorities have encountered unprecedented difficulties in tracking and reporting these transactions. Oftentimes, the lack of transparency and compliance issues with taxes have been a headache for regulatory agencies. With the U.S. facing financial constraints, after imposing a $4.6 billion fine on Binance, federal judges rejected some of the SEC’s lawsuits against Binance and Zhao Changpeng, but recently allowed other charges such as ICO issuance, ongoing sales of BNB, BNB Vault, staking services, and unregistered and fraudulent charges to continue.
In order to generate more revenue, the U.S. Congress passed the “Infrastructure Investment and Jobs Act” in 2021, which includes revisions to the “Internal Revenue Code,” especially regarding reporting requirements for digital asset transactions. According to this legislation, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have drafted and published new regulations for reporting digital asset transactions. These regulations require financial institutions and brokers to report detailed information about digital asset transactions, including gross proceeds and adjusted basis.
Aiying has summarized the entire report into three main parts to help you clearly understand the main content of this revised law:
Part 1: Definition of Digital Assets
– Scope of Definition: The new regulations broadly define “digital assets” as a representation of value recorded on a cryptographic distributed ledger (such as a blockchain). This includes but is not limited to cryptocurrencies, stablecoins, and NFTs.
Part 2: Reporting Requirements
– Main Requirements: The new regulations require brokers and financial institutions to report detailed information for each digital asset transaction, including transaction date, amount, asset type, adjusted basis, and counterparty information.
Part 3: Implementation Date
– Effective Date: The new regulations will take effect 60 days after their official publication in the Federal Register. There are different phases for the implementation of the law, with the initial date being December 31, 2023, and full compliance required by 2025 and 2026.
In general, the new regulations will have a significant impact on the financial market and tax compliance. They will require investors to be more cautious, prompt trading platforms to upgrade their systems and processes, increase market transparency, but also raise compliance costs.
The broad definition of “digital assets” in the legislation may lead to almost every NFT and stablecoin transaction being reported, even simple operations such as exchanging USDC for USD will need to be reported to the IRS, even if it’s just a few cents of profit or loss. This policy may deter people from trading on exchanges and instead turn to DeFi, thus having the opposite effect.
References:
1. U.S. Congress. “Infrastructure Investment and Jobs Act,” 2021. [Link]
2. U.S. Department of the Treasury, Internal Revenue Service. “Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions,” Federal Register, 88 FR 59576, August 29, 2023.
3. U.S. Department of the Treasury. “Revisions to the Internal Revenue Code.” [Link]
4. Official Federal Register website. [Link]
5. IRS Announcement. “Digital Asset Transaction Reporting Guidelines,” 2023. [Link]
6. Academic research and industry reports. “Digital Asset Markets and Tax Compliance,” 2022. [Link]
