Interpretation of the new IRS regulations: Cryptocurrency and stablecoin transactions need to be taxed, which may prompt users to turn to DEX

Original title: "Key points of the new IRS regulations: Cryptocurrency and stablecoin transactions need to be reported, which may prompt users to turn to DEX"

Original author: Aiying compliance

In recent years, digital assets have set off a wave of enthusiasm in the financial market. From cryptocurrencies such as Bitcoin and Ethereum, to stablecoins such as USDT, to NFTs (non-fungible tokens), these new assets have not only attracted a large number of investors, but also triggered technological innovation and regulatory discussions around the world.

However, the rapid rise of digital assets has also brought many problems. Due to their anonymity and cross-border mobility, tax authorities have encountered unprecedented difficulties in tracking and reporting these transactions. Many times, tax opacity and compliance issues give regulators a headache. In addition, the US finances have been very tight in recent years. After a fine of 4.6 billion for Binance, although the US federal judge dismissed part of the SEC's lawsuit against Binance and Zhao Changpeng, it recently allowed other charges such as ICO issuance, continued sales of BNB, BNB Vault, pledge services, unregistered and fraud charges to continue litigation and fines. However, the "support" of a single company for the current US finances is definitely a drop in the bucket, so in order to generate more revenue, the US Congress passed the Infrastructure Investment and Jobs Act in 2021, which includes amendments to the Internal Revenue Code, especially reporting requirements for digital asset transactions. Under this bill, the US Treasury and the Internal Revenue Service (IRS) drafted and issued new digital asset transaction reporting regulations. These regulations require financial institutions and brokers to report detailed information on digital asset transactions, including gross proceeds and adjusted basis of transactions.

Aiying has sorted out the entire report for you and summarized it into three parts, so that you can clearly understand the main contents of this revised bill:

1. Definition of digital assets

1. Scope of definition

In this new regulation, "digital assets" are broadly defined as a representation of value recorded on an encrypted distributed ledger (such as a blockchain). Specifically including but not limited to the following types:

· Cryptocurrency: Such as Bitcoin, Ethereum, etc., these are the most widely recognized digital assets, mainly used for payment and investment.

· Stablecoins: Such as USDT, USDC, these currencies are usually pegged to legal currencies (such as the US dollar) and are designed to maintain a stable value for transactions and payments.

· Non-fungible tokens (NFTs): such as digital artworks and collectibles, these tokens represent unique assets, and each NFT is unique, and are widely used in fields such as art, music, and games.

The regulations have not finalized the rules for unhosted wallets and related unhosted software. The IRS said these tools may be considered brokers, and the specific regulations will be determined later.

In addition, the regulations also stipulate that the definition of digital assets is not limited to the above types, and any assets recorded using similar technologies may be included in this category. This means that whether these assets are traded on or off-chain, as long as they involve digital representation of value, they need to be reported. (Exempt types are excluded, which will be discussed below)

II. Reporting requirements

1. Main requirements

The new regulations require brokers and financial institutions to report detailed information on each digital asset transaction. Specifically, they need to report how much money they made from each transaction (gross profit) and how much they originally spent to buy it (adjusted basis).

2. Report content

In order to comply with the regulations, brokers and financial institutions need to report the following information:

· Transaction date: The specific date when the transaction occurred.

· Transaction amount: The total amount of the transaction, that is, how much you sold.

· Asset type: The type of digital asset involved in the transaction, such as Bitcoin, Ethereum, USDT, NFT, etc.

· Adjusted basis: The price at which you originally bought these digital assets, minus some adjusted amounts, to calculate the net profit or loss.

· Counterparty information: Relevant information about the buyer and seller to ensure that the transaction is transparent and traceable.

3. Exemptions

· Stablecoins and NFTs

For stablecoins and NFTs, the regulations have some special provisions and reporting methods.

· Stablecoins: Stablecoins such as USDT and USDC are usually pegged to legal currencies such as the US dollar and have a relatively stable value. Regulations require that stablecoin transactions also need to be reported, but in order to reduce the burden on brokers, some types of stablecoin transactions may have simplified reporting methods. For example, for frequent small transactions, aggregate reporting can be used instead of detailed reporting on each transaction.

· NFT: Non-fungible tokens (NFTs) represent unique digital assets, such as digital artworks, collectibles, etc. Most NFT transactions also need to be reported, but the regulations also take into account certain low-value NFT transactions, which may have simplified reporting requirements or exemptions. For example, if you are just buying and selling some digital collectibles of low value, you may not need to report as detailed as high-value transactions.

· Closed-loop assets

"Closed-loop assets" refer to virtual assets that can only be used within a specific system and cannot be exchanged for legal currency. Here are some relevant exceptions:

· In-game currency: If a virtual currency can only be used in a specific game or platform and cannot be exchanged for legal currency such as the US dollar, then this virtual currency may not be within the scope of reporting. For example, gold coins earned in a game do not need to be reported if they can only be used in this game.

· Internal company points: Similarly, points issued by the company that can only be used within the company do not need to be reported as digital assets. If these points cannot be exchanged for external legal currency and can only be consumed within the company, then they are not within the definition of digital assets.

· In general, the purpose of the amendment bill is to make digital asset transactions transparent and ensure that everyone can pay taxes. Although it is very tempting to collect money, the regulations still "thoughtfully" take into account the convenience of everyone's tax payment operations, such as some small transactions do not need to be reported, so that everyone is not too busy.

III. Implementation date of the regulations

1. Effective date

The new digital asset transaction reporting regulations will take effect 60 days after they are officially published in the Federal Register. Therefore, the specific effective date depends on when this regulation is published in the Federal Register. In addition, some provisions in the regulations may have different effective dates, depending on the specific provisions of each provision. The bill is divided into three stages

· After December 31, 2023: This is the initial date when the regulations officially take effect, indicating that from this point in time, all relevant reports and declarations need to follow the new regulations.

· Operational compliance in 2025: It means that starting from 2025, all affected institutions need to fully meet the operational compliance requirements, including system updates, employee training and comprehensive implementation of reporting processes.

· Basis tracking in 2026: Starting from 2026, the tracking and reporting of transaction basis (original purchase price and related adjustments) are required. This may be a more specific and stricter tracking requirement to ensure that the tax basis information of all transactions is accurately recorded and reported.

2. Preparation

In order to ensure that relevant requirements can be complied with smoothly after the regulations come into effect, relevant practitioners and institutions need to make the following preparations in advance:

· Update systems and processes: Ensure that your trading platform and back-end systems can record and report all required information, such as transaction date, amount, asset type, etc. If necessary, you may also need to update or upgrade existing systems.

· Train employees: Let all relevant employees understand the specific requirements and reporting processes of the new regulations. This includes training for front-end and back-end staff to let them know what information needs to be collected and submitted.

· Review and adjust policies: Check existing compliance policies and procedures to ensure that they meet the requirements of the new regulations. If necessary, adjust internal policies to better implement new reporting standards.

· Communicate with customers: Inform customers about the changes in the new regulations, tell them what information they need to provide, and ensure that they understand their new obligations.

· Establish a compliance team: If you don’t have one already, consider setting up a dedicated compliance team to oversee and manage the reporting of all digital asset transactions to ensure that all transactions comply with the requirements of the new regulations and avoid legal issues.

· Test the reporting process: Before the regulations officially come into effect, conduct simulation tests to ensure that all systems and processes can run smoothly. This includes trial running the reporting process to check whether the required information can be accurately captured and reported.

Through these preparations, relevant practitioners and institutions can be fully prepared before the new regulations come into effect and ensure that they can comply with all new reporting requirements smoothly after the regulations are implemented. This will not only avoid legal risks, but also ensure that companies remain compliant and competitive in the new regulatory environment.

Aiying 艾盈汇总

In general, these new digital asset transaction reporting regulations will have a great impact on financial markets and tax compliance. They will make investors more cautious when trading, prompt trading platforms to upgrade systems and processes, and increase market transparency, but they will also increase compliance costs.

The definition of "digital assets" in the bill is too broad. Almost every NFT transaction and stablecoin transaction needs to be reported, and even operations such as exchanging USDC for US dollars need to be reported to the IRS, even if it is only a few cents of gain or loss. This policy may inhibit people from trading on exchanges and turn to Defi, so it is counterproductive.

References:

1. U.S. Congress. Infrastructure Investment and Jobs Act, 2021. [link](https://www.congress.gov/bill/117th-congress/house-bill/3684).

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. Amendments to the Internal Revenue Code. [link](https://www.irs.gov/).

4. Federal Register official website. [link](https://www.federalregister.gov/).

5. IRS Notice. "Guidelines for Reporting Digital Asset Transactions", 2023. [link](https://www.irs.gov/pub/irs-drop/n-21-61.pdf).

6. Academic Research and Industry Report. "Digital Asset Markets and Tax Compliance", 2022. [link](https://example.com/digital-assets-tax-compliance).

https://www.federalregister.gov/public-inspection/2024-14004/gross-proceeds-and-basis-reporting-by-brokers-and-determination-of-amount-realized-and-basis-for

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