New US IRS regulations: Cryptocurrency and stablecoin transactions are subject to tax reporting, and trading behavior will shift to decentralized finance (DeFi) alternatives? What impact will this have?

In recent years, digital assets such as Bitcoin, Ethereum, USDT, and NFTs have surged in popularity, gaining global attention for their investment potential and sparking debate about regulatory frameworks.

However, the rapid rise of digital assets has posed significant challenges to tax authorities due to their anonymous and cross-border nature. Tax transparency and compliance issues are particularly daunting, exacerbated by tight fiscal conditions and recent regulatory actions such as the large fine imposed on Binance by a U.S. federal court.

To address these issues and raise revenue, the U.S. Congress passed the Infrastructure Investment and Jobs Act in 2021, which amended the Internal Revenue Code to include new reporting requirements for digital asset transactions. Under these regulations, financial institutions and brokers must report detailed transaction information, including gross proceeds and adjusted basis for each digital asset transaction.

Coinlive 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

Scope definition: The new regulations broadly define "digital assets" as representations of value recorded on distributed ledgers, including but not limited to the following types:

• Cryptocurrencies such as Bitcoin and Ethereum, which are mainly used for payment and investment.

• Stablecoins, such as USDT and USDC, are pegged to fiat currencies such as the US dollar and are designed to maintain a stable value for transactions and payments.

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

The regulations have not finalized the rules on unhosted wallets and related unhosted software. The IRS said these tools may be considered brokers, and 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-chain or off-chain, as long as they involve digital representation of value, they need to be reported. (Except for exemption types)

II. Reporting requirements

1. Key requirements: The new regulations require brokers and financial institutions to report detailed information on each digital asset transaction, including the revenue (gross proceeds) of each transaction and the cost of purchasing these assets (adjusted basis).

2. Report content: Financial institutions and brokers must report comprehensive details of each digital asset transaction, including:

• Transaction date: The specific date of the transaction.

• Transaction amount: The total value of the transaction.

• Asset type: The type of digital asset involved (such as Bitcoin, Ethereum, USDT, NFT).

• Adjusted basis: The initial purchase price of the digital asset, adjusted to calculate the gain or loss.

• Counterparty information: Details of both parties to the transaction to ensure transparency and traceability.

3. Exemptions: Stablecoins and NFTs For stablecoins and NFTs, certain types of transactions will consider special reporting methods:

• Stablecoins: Stablecoins like USDT and USDC are usually pegged to fiat currencies such as the US dollar and have a relatively stable value. According to regulatory requirements, 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 for each transaction.

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

In general, this amendment to the bill is to make digital asset transactions more transparent and ensure that everyone can pay taxes according to regulations. Although the purpose is to increase tax revenue, the regulations also take into account the convenience of everyone's tax reporting. For example, some small transactions do not need to be reported to avoid being troubled by cumbersome operations.

III. Implementation date of the regulations

1. Effective date: The new regulations will take effect 60 days after publication in the Federal Register. The effective dates of specific provisions may vary and are divided into several phases:

• After December 31, 2023: Initial compliance phase begins, requiring compliance with new reporting standards.

• Operational compliance in 2025: Full operational compliance is required by 2025, including system upgrades, employee training, and comprehensive reporting procedures.

• Basis tracking in 2026: Enhance tracking and reporting of transaction basis (original purchase price and adjustments) to ensure accurate tax reporting.

2. Preparation: In order to comply with the regulations, stakeholders must:

• Update systems and processes to record and report required transaction details.

• Train employees on new regulatory requirements and reporting procedures.

• Review and adjust compliance policies as needed to meet new reporting standards.

• Communicate changes to clients to ensure understanding and compliance.

• Establish a compliance team to oversee and manage reporting obligations, minimize legal risks and stay competitive in the changing regulatory environment.

Through these preparations, relevant practitioners and institutions can be fully prepared before the new regulations come into effect, ensuring smooth compliance with all new reporting requirements after the regulations are implemented. This not only avoids legal risks, but also ensures that companies remain compliant and competitive in the new regulatory environment.

UK Tax Regulatory Policy

The development of crypto assets in the field of taxation has shown its complexity and diversity, bringing new challenges and requirements to tax management. As one of the important countries in the global fintech field, the UK has demonstrated its leading legislative and regulatory role in the tax policy of crypto assets. The following is an analysis of the foundation, current situation and future development of UK crypto asset taxation:

Taxes in the UK are managed by HM Revenue and Customs (HMRC), mainly including income tax, capital gains tax, corporate income tax, value-added tax, etc. Income tax and capital gains tax are levied according to different levels of income and capital gains, while value-added tax is an indirect tax levied on the added value of goods and services.

A review of the history of UK crypto asset taxation

Preliminary exploration (2014-2018): HMRC issued the first crypto asset tax guidance in 2014, incorporating crypto assets into the existing tax framework. A crypto asset task force was established in 2018 to further study and formulate policies.

Refining the rules (2019-2021): HMRC has issued several tax guidances, providing specific rules for different types of crypto assets (such as utility tokens, security tokens), including corporate activities, mining and staking.

Dealing with DeFi (2022 to present): HMRC has released its fifth tax guidance, focusing on decentralized finance (DeFi), and issued consultation documents in 2022 and 2023 to further regulate the taxation of DeFi lending and staking activities.

The UK adopts the existing tax framework to include crypto assets in the scope of income tax and capital gains tax. This means that taxpayers need to calculate and declare the income and profits obtained from crypto assets according to their own circumstances, and apply the corresponding tax rates and exemptions.

Future: Further improvement of the DeFi tax system

The UK government is currently working to improve the tax framework for DeFi to better accommodate its complexity and diversity. The proposed reforms include treating DeFi transactions as repurchase agreements, eliminating the problem of double taxation of the same crypto assets, while simplifying the record-keeping and reporting burden for taxpayers. These measures are intended to maintain a fair competitive environment and promote the healthy development of the crypto asset market.