New U.S. Digital Asset Tax Regulations Cause Industry Shock

Recently, the Internal Revenue Service (IRS) in the United States released final regulations on the sale and trading of digital assets, marking a further upgrade in the U.S. tax regulation of cryptocurrency assets. This regulation will take effect on January 1, 2025, requiring all brokers holding clients who sell digital assets to use the new 1099-DA form to report core information about each transaction to the IRS. Notably, decentralized finance (DeFi) front-end service providers are also recognized as cryptocurrency brokers and are required to fulfill corresponding tax reporting obligations.

At the same time, the cryptocurrency division of a well-known venture capital firm expressed support for a lawsuit against this new regulation. The head of regulation at the firm believes that the new rules pose a direct threat to the development of DeFi and could hinder innovation in the DeFi space in the United States. Relevant agencies have filed a lawsuit against the IRS and the Treasury Department, accusing them of exceeding their statutory authority, violating the Administrative Procedure Act (APA), and even raising constitutional concerns.

Looking back at the evolution of the tax regulation of digital assets in the United States, the path of its evolution is clearly visible. In 2014, the IRS first defined cryptocurrencies as property rather than currency, establishing a corresponding tax treatment framework. In 2021, the signing of the Infrastructure Investment and Jobs Act (IIJA) further expanded the reporting scope of digital asset transactions. With the introduction of the latest broker reporting rules, the tax regulation of digital assets in the United States has reached an unprecedented level of strictness.

The new regulations detail the tax reporting requirements that brokers must adhere to when providing digital asset sales and trading services. It clarifies the definition of brokers, which includes not only traditional digital asset trading platforms, payment processors, and custodial wallet providers but also DeFi service providers that execute trades automatically through software or smart contracts. This means that even if DeFi platforms do not directly hold customer private keys or digital assets, as long as they provide core services such as trading interfaces, order processing, and execution, they must comply with the relevant tax reporting regulations.

Form 1099-DA is an important tool for the IRS to address the increasing frequency of cryptocurrency transactions and the challenges in tax regulation. This form requires brokers to provide detailed disclosures of transaction dates, types, amounts, as well as comprehensive information about the investors, including their names, addresses, and social security numbers. It also requires the specific types, quantities, and fair market values of digital assets.

The introduction of new regulations undoubtedly imposes stricter tax reporting requirements on cryptocurrency brokers. To meet these standards, brokers must fully implement KYC (Know Your Customer) policies, which will lead to a significant increase in operational costs and greater compliance challenges. From the perspectives of anti-money laundering, counter-terrorism financing, and anti-tax evasion, enhancing the transparency of digital assets is an important measure to address potential financial crimes and maintain tax fairness.

However, the new regulations have had a significant impact on the DeFi sector. DeFi provides flexible and efficient financial services outside the traditional financial system due to its decentralization and anonymity. However, the strengthening of regulations may seriously challenge these characteristics. The new regulations require the disclosure of investors' wallet addresses and transaction amounts, which will undermine the anonymity of DeFi and force investors to change their trading habits. At the same time, to meet reporting requirements, DeFi platforms need to increase resource investment, which will not only raise operational costs but may also affect the autonomous operation of smart contracts, increasing the level of human intervention.

More critically, the new regulations may have a profound impact on the DeFi ecosystem, challenging the core mission of DeFi, which aims to popularize the ease of use of currency and payment methods, promote the globalization of financial services, and decentralization. If DeFi becomes transparent and de-anonymized, its market appeal and development potential may be affected.

The new regulations not only affect DeFi but could also lead to significant changes in the entire cryptocurrency industry. Small or startup brokers may exit the market due to the inability to bear compliance costs, exacerbating the reshuffling of the industry. At the same time, the new regulations have sparked debates over privacy, data security, and constitutional rights, which may also stifle the innovative drive in the industry.

To some extent, this rule aims to enhance tax transparency, combat illegal activities, and ensure tax fairness and market order. However, the urgency of its implementation has also raised concerns about the future development of the cryptocurrency industry. Finding a balance between encouraging innovation and strengthening regulation has become a pressing issue that needs to be addressed.

In the future, the cryptocurrency industry may go through a period of adjustment. Although each regulatory tightening may bring setbacks, the resilience and innovative capacity demonstrated by the cryptocurrency industry are expected to help it weather the storm. While the road ahead is filled with uncertainty, the cryptocurrency industry still has a broad outlook and limitless possibilities.